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FORM DEF 14A
ILLINOIS TOOL WORKS INC − ITW
Filed: March 28, 2006 (period: May 05, 2006)
Official notification to shareholders of matters to be brought to a vote (Proxy)
Table of Contents


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                                                                   UNITED STATES
                                                       SECURITIES AND EXCHANGE COMMISSION
                                                                Washington, D.C. 20549

                                                                             SCHEDULE 14A

                                                    Proxy Statement Pursuant to Section 14(a) of the Securities
                                                           Exchange Act of 1934 (Amendment No. )

    Filed by the Registrant x
    Filed by a Party other than the Registrant o

    Check the appropriate box:

    o   Preliminary Proxy Statement
    o   Confidential, for Use of the Commission Only (as permitted by Rule 14a−6(e)(2))
    x   Definitive Proxy Statement
    o   Definitive Additional Materials
    o   Soliciting Material Pursuant to §240.14a−12

                                                               ILLINOIS TOOL WORKS INC.

                                                           (Name of Registrant as Specified In Its Charter)

                                              (Name of Person(s) Filing Proxy Statement, if other than the Registrant)

   Payment of Filing Fee (Check the appropriate box):

    x No fee required.
    o Fee computed on table below per Exchange Act Rules 14a−6(i)(4) and 0−11.

        1) Title of each class of securities to which transaction applies:



        2) Aggregate number of securities to which transaction applies:



        3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0−11 (set forth the amount on which the filing fee is
    calculated and state how it was determined):


        4) Proposed maximum aggregate value of transaction:



        5) Total fee paid:



        o Fee paid previously with preliminary materials.



       o Check box if any part of the fee is offset as provided by Exchange Act Rule 0−11(a)(2) and identify the filing for which the offsetting fee was paid
    previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

        1) Amount Previously Paid:



        2) Form, Schedule or Registration Statement No.:
3) Filing Party:



       4) Date Filed:

                          Persons who are to respond to the collection of information contained in this form are not required to respond unless the
SEC 1913 (11−01)          form displays a currently valid OMB control number.
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                                         Illinois Tool Works Inc.
                                           3600 West Lake Avenue
                                           Glenview, Illinois 60026

                                  Notice of Annual Meeting of Stockholders
                                             Friday, May 5, 2006
                                                  3:00 P.M.
                                       The Northern Trust Company
                                           50 South LaSalle Street
                                               Chicago, Illinois

       ITW is holding its 2006 Annual Meeting for the following purposes:

          1. To elect ten directors for the upcoming year;
          2. To approve the amendment of our Restated Certificate of Incorporation to increase our authorized
             shares;
          3. To approve the Illinois Tool Works Inc. 2006 Stock Incentive Plan;
          4. To ratify the appointment of Deloitte & Touche, LLP as ITW’s independent public
             accountants; and
          5. To consider stockholder proposals, if presented at the Annual Meeting.

      The Board of Directors recommends that you vote FOR each of the director nominees; FOR the
amendment of our Restated Certificate of Incorporation; FOR the approval of the 2006 Stock Incentive Plan;
FOR the ratification of the appointment of Deloitte & Touche LLP as ITW’s independent public accountants for
2006; and AGAINST each of the stockholder proposals.
      Stockholders of record on March 7, 2006 are entitled to vote.
      It is important that your shares are represented at the Annual Meeting whether or not you plan to attend.
To be certain that your shares are represented, please sign, date and return the enclosed proxy card as soon as
possible or vote by telephone or the internet by following the instructions on the proxy card. You may revoke
your proxy at any time before it is voted at the Annual Meeting.
      Our Annual Report for 2005 is enclosed.
                                             By Order of the Board of Directors,
                                                                     James H. Wooten, Jr.
                                                                           Secretary
March 28, 2006
Illinois Tool Works Inc.


                                             Proxy Statement
                                             Table of Contents

                                                                                        Page
Questions and Answers                                                                            1
Election of Directors                                                                            5
Board of Directors and Its Committees                                                            8
Corporate Governance Policies and Practices                                                     10
Director Compensation                                                                           11
Ownership of ITW Stock                                                                          13
Section 16(a) Beneficial Ownership Reporting Compliance                                         16
Executive Compensation                                                                          17
Equity Compensation Plan Information                                                            21
Report of the Compensation Committee on Executive Compensation                                  22
Company Performance                                                                             25
Report of the Audit Committee                                                                   26
Proposal to Amend our Restated Certificate of Incorporation                                     28
Approval of the Illinois Tool Works Inc. 2006 Stock Incentive Plan                              30
Ratification of the Appointment of Independent Public Accountants                               35
Stockholder Proposal — China Business Principles for Rights of Workers in
 China                                                                                          37
Stockholder Proposal — Director Election Majority Vote Standard                                 40
Categorical Standards for Director Independence                                                A−1


                                      Annual Report on Form 10−K
      You may review and download a copy of ITW’s Annual Report on Form 10−K for the year ended
December 31, 2005, including schedules that we filed with the Securities and Exchange Commission by
accessing our website, www.itw.com, or you may request a paper copy by writing to: James H.
Wooten, Jr., Secretary, Illinois Tool Works Inc., 3600 West Lake Avenue, Glenview, Illinois 60026.
     This proxy statement and form of proxy are first being sent to stockholders on or about March 28, 2006.
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                                          Questions and Answers
      Following are questions often asked by stockholders of publicly held companies. We hope that the
answers will assist you in casting your vote.

What am I voting on?
       We are soliciting your vote on:

          1. The election of ten directors for the upcoming year;
          2. The approval of the amendment of our Restated Certificate of Incorporation;
          3. The approval of the Illinois Tool Works Inc. 2006 Stock Incentive Plan;
          4. The ratification of the appointment of Deloitte & Touche, LLP as ITW’s independent public
             accountants for 2006; and
          5. Stockholder proposals, if presented at the Annual Meeting.


Who may vote?
      Stockholders at the close of business on March 7, 2006, the record date, may vote. On that date, there
were 282,968,754 shares of ITW common stock outstanding.

How many votes do I have?
       Each share of ITW common stock that you own entitles you to one vote.

How do I vote?
       You may vote your shares in one of the following four ways:
1.        By mail:               Complete the proxy card and sign, date and return it in the enclosed envelope;
2.        By telephone:          Call the toll−free number on the proxy card, enter the holder account number
                                 and the proxy access number from the proxy card, and follow the recorded
                                 instructions;
3.        By internet:           Go to the website listed on the proxy card, enter the holder account number and
                                 the proxy access number from the proxy card, and follow the instructions
                                 provided; or
4.        In person:             Attend the Annual Meeting, where ballots will be provided.

If you hold your shares through a bank or broker that does not offer telephone or internet voting, please
complete and return your proxy card by mail.
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How does discretionary voting authority apply?
       If you sign, date and return your proxy card, your vote will be cast as you direct. If you do not indicate
how you want to vote, you give authority to Marvin D. Brailsford, Susan Crown and Harold B. Smith to vote on
the items discussed in these proxy materials and on any other matter that is properly raised at the Annual
Meeting. If you do not indicate how you want to vote, your proxy will be voted FOR the election of each
director nominee, FOR the approval of the amendment of our Restated Certificate of Incorporation, FOR the
approval of the 2006 Stock Incentive Plan, FOR the ratification of the appointment of Deloitte & Touche LLP
as ITW’s independent public accountants, AGAINST each of the stockholder proposals and FOR or AGAINST
any other properly raised matter at the discretion of Ms. Crown and Messrs. Brailsford and Smith.

May I revoke my proxy?
       You may revoke your proxy at any time before it is voted at the Annual Meeting in one of four ways:

          1. Notify ITW’s Secretary in writing before the Annual Meeting that you wish to revoke your proxy;
          2. Submit another proxy with a later date;
          3. Vote by telephone or internet after you have given your proxy; or
          4. Vote in person at the Annual Meeting.


What does it mean if I receive more than one proxy card?
       Your shares are likely registered differently or are in more than one account. You should sign and return
all proxy cards to guarantee that all of your shares are voted.

What constitutes a quorum?
      The presence, in person or by proxy, of the holders of a majority of ITW shares entitled to vote at the
Annual Meeting constitutes a quorum. Your shares will be considered part of the quorum if you return a signed
and dated proxy card or if you vote by telephone or internet. Abstentions and broker non−votes are counted as
“shares present” at the meeting for purposes of determining if a quorum exists. A broker non−vote occurs when
a broker submits a proxy that does not indicate a vote as to a proposal because he or she does not have voting
authority and has not received voting instructions from you.

What vote is required to approve each proposal?
       Election of Directors: The ten nominees who receive the highest number of votes will be elected.
However, any nominee who fails to receive the affirmative vote of a majority of the votes cast will tender his or
her resignation in accordance with our Corporate Governance Guidelines discussed more fully on page 10. If
you do not want to vote your shares for a particular nominee, you may indicate that in the space provided on the
proxy card or withhold authority as prompted during telephone or internet voting. Broker non−votes and votes
to withhold authority for one or more nominees are not considered shares voted and will not affect the outcome
of the vote.
                                                        2
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      Approval of the Amendment of our Restated Certificate of Incorporation: Approval of this proposal
would require the affirmative vote of a majority of the holders of our outstanding common stock. An abstention
will have the effect of a vote against the proposal, but a broker non−vote will have no effect.
      Approval of the Illinois Tool Works Inc. 2006 Stock Incentive Plan: Approval of this proposal would
require the affirmative vote of a majority of the shares present or represented by proxy at the Annual Meeting
and entitled to vote. An abstention will have the effect of a vote against the proposal, but a broker non−vote will
have no effect.
      Ratification of the Appointment of Independent Public Accountants: Although we are not required to
submit the appointment of our independent public accountants to a vote of stockholders, we believe that it is
appropriate to ask that you ratify the appointment. Ratification of the appointment of Deloitte & Touche LLP as
ITW’s independent public accountants requires the affirmative vote of a majority of the shares present or
represented by proxy at the Annual Meeting and entitled to vote. An abstention will have the effect of a vote
against the ratification, but a broker non−vote will have no effect.
      Stockholder Proposals: Approval of each stockholder proposal presented at the Annual Meeting would
require the affirmative vote of a majority of the shares present or represented by proxy at the Annual Meeting
and entitled to vote. An abstention will have the effect of a vote against the proposal, but a broker non−vote will
have no effect.

How do I submit a stockholder proposal?
       To be considered for inclusion in our proxy statement for the May 2007 Annual Meeting, a stockholder
proposal must be received no later than November 28, 2006. Your proposal must be in writing and must comply
with the proxy rules of the Securities and Exchange Commission (“SEC”). You may also submit a proposal that
you do not want included in the proxy statement, but that you want to raise at the May 2007 Annual Meeting. If
you submit that proposal after February 3, 2007, then SEC rules permit the individuals named in the proxies
solicited by ITW’s Board of Directors for that meeting to exercise discretionary voting power as to that
proposal. You should send your proposal to our Secretary at our address on the cover of this proxy statement.

How do I nominate a director?
       If you wish to nominate an individual for election as a director at the May 2007 Annual Meeting, our
Secretary must receive your written nomination by December 29, 2006. Our by−laws require that your
nomination include: (1) your name and address; (2) the name, age and home and business addresses of the
nominee; (3) the principal occupation or employment of the nominee; (4) the number of shares of ITW stock
that the nominee beneficially owns; (5) a statement that the nominee is willing to be nominated and serve as a
director; and (6) any other information regarding the nominee that would be required by the SEC to be included
in a proxy statement had ITW’s Board of Directors nominated that individual. Any nomination that you make
must be approved by the Corporate Governance and Nominating Committee as well as by the Board of
Directors.

                                                        3
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Who pays to prepare, mail and solicit the proxies?
      ITW will pay all of the costs of preparing and mailing the proxy statement and soliciting these proxies.
We will ask brokers, dealers, banks, voting trustees and other nominees and fiduciaries to forward the proxy
materials and our Annual Report to the beneficial owners of ITW common stock. Upon request, we will
reimburse them for their reasonable expenses. In addition to mailing proxy materials, our officers, directors and
employees may solicit proxies in person, by telephone or otherwise.

                                                        4
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                                           Election of Directors

       Stockholders are being asked to elect ten directors at the Annual Meeting. The individuals listed below
have been nominated by the Board of Directors as recommended by the Corporate Governance and Nominating
Committee. Each director will serve until the May 2007 Annual Meeting, until a qualified successor director has
been elected, or until he or she resigns or is removed by the Board of Directors.
       We will vote your shares as you specify on the enclosed proxy card, by telephone or by internet. If you do
not specify how you want your shares voted, we will vote them FOR the election of all the nominees listed
below. If unforeseen circumstances (such as death or disability) make it necessary for the Board of Directors to
substitute another person for any of the nominees, we will vote your shares FOR that other person. The Board
of Directors does not anticipate that any nominee will be unable to serve. The nominees have provided the
following information about themselves:

                                William F. Aldinger, 58, retired as the Chairman and Chief Executive Officer
                                of HSBC Finance Corporation (formerly Household International, Inc.), a
                                consumer finance company, in April 2005, a position he held since 1996. He
                                also retired as Chairman and Chief Executive Officer of its parent company,
                                HSBC North America Holdings Inc., a position he held since 2004. He serves
                                on the boards of AT&T Inc, KKR Financial Corp. and The Charles Schwab
                                Corporation. Mr. Aldinger has served as a director of ITW since 1998.



                                Michael J. Birck, 68, has served as the Chairman of Tellabs, Inc. since 2000
                                and Chief Executive Officer from 2002 to February 2004. Mr. Birck founded
                                Tellabs and served as President and Chief Executive Officer from 1975 to
                                2000. Tellabs designs, manufactures, markets and services voice and data
                                equipment. He is a director of Molex, Inc. and Tellabs, Inc. Mr. Birck has
                                served as a director of ITW since 1996.




                                Marvin D. Brailsford, 67, is a retired Vice President of Kaiser−Hill Company
                                LLC, a construction and environmental services company. Prior to his
                                employment with Kaiser−Hill, he served with the United States Army for
                                33 years, retiring with the rank of Lieutenant General. He is a Director of
                                Conn’s, Inc. Mr. Brailsford has served as a director of ITW since 1996.




                                                       5
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                    Susan Crown, 47, has been Vice President of Henry Crown and Company, a
                    business with diversified investments, since 1984. She is a director of Northern
                    Trust Corporation and its subsidiary, The Northern Trust Company. Ms. Crown
                    has served as a director of ITW since 1994.




                    Don H. Davis, Jr., 66, retired as Chairman of the Board of Rockwell
                    Automation, Inc., a leading global provider of industrial automation power,
                    control and information products and services, in February 2005, a position he
                    had held since 1998. From 1997 to 2004 he served as Rockwell’s Chief
                    Executive Officer. He is a director of Rockwell Automation, Inc., Ciena
                    Corporation and Journal Communications, Inc. Mr. Davis has served as a
                    director of ITW since 2000.



                    Robert C. McCormack, 66, is an Advisory Director of Trident Capital, Inc., a
                    venture capital firm, and was a Partner of Trident from 1993 to the end of
                    2004. From 1987 to 1993, Mr. McCormack served successively as Deputy
                    Under Secretary of Defense and Assistant Secretary of the Navy (Finance and
                    Comptroller). He is a director of DeVry Inc., Mead Westvaco Corporation and
                    Northern Trust Corporation and its subsidiary, The Northern Trust Company.
                    Mr. McCormack has served as a director of ITW since 1993, and previously
                    served as a director of ITW from 1978 through 1987.

                    Robert S. Morrison, 63, is a retired Vice Chairman of PepsiCo, Inc., a
                    beverage and food products company, serving from 2001 to 2003. From 1997
                    to 2001, prior to its merger with PepsiCo, he was Chairman, President and
                    Chief Executive Officer of The Quaker Oats Company. He also served as
                    interim Chairman and Chief Executive Officer of 3M Co. from June to
                    December 2005. Mr. Morrison is a director of 3M, The Tribune Company and
                    Aon Corporation. Mr. Morrison has been a director of ITW since 2003.



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                    James A. Skinner, 61, has served as Vice Chairman of McDonald’s
                    Corporation, a restaurant chain, since 2003 and Chief Executive Officer since
                    November 2004, previously serving as President and Chief Operating Officer
                    of McDonald’s Restaurant Group from February 2002 to December 2002;
                    President and Chief Operating Officer of McDonald’s Europe, Asia/ Pacific,
                    Middle East and Africa from June 2001 to February 2002; and President of
                    McDonald’s−Europe from December 1997 to June 2001. He is a director of
                    Walgreen Co. and was elected as a director of ITW in August 2005.


                    David B. Speer, 55, has served as Chief Executive Officer of ITW since
                    August 2005 and President since August 2004, previously serving as Executive
                    Vice President from 1995 to August 2004. Mr. Speer has 27 years of service
                    with ITW. He is a director of Rockwell Automation, Inc. and was elected a
                    director of ITW in August 2005.




                    Harold B. Smith, 72, is a retired officer of ITW and is a director of W.W.
                    Grainger Inc., Northern Trust Corporation and its subsidiary, The Northern
                    Trust Company. Mr. Smith has served as a director of ITW since 1968.




                                          7
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                                Board of Directors and Its Committees
       ITW’s Board of Directors met five times during 2005. In addition to meetings of the full Board, directors
attended meetings of Board committees, independent directors met twice in regularly scheduled executive
sessions, and non−management directors met once. The Chairmen of each of the Board of Directors’ standing
committees rotate as the Chairman of executive sessions of the independent directors. The Board of Directors
has standing audit, compensation, corporate governance and nominating, and finance committees. Under the
terms of their charters, each member of the audit, compensation and corporate governance and nominating
committees must meet applicable New York Stock Exchange (“NYSE”) and Securities and Exchange
Commission (“SEC”) independence requirements. ITW encourages its directors to attend all Board and
committee meetings and the Annual Meeting of Stockholders. In 2005, all of the directors attended at least 88%
of the meetings of the Board and the committees on which they serve, and all of the directors attended the
Annual Meeting of Stockholders.

Audit Committee
Meetings in 2005:                  5
Members:                           Don H. Davis, Jr. (Chairman)
                                   William F. Aldinger
                                   Michael J. Birck
                                   Marvin D. Brailsford
                                   James A. Skinner
Function:                          Responsible for the engagement of independent public accountants;
                                   assisting the Board with respect to matters involving and overseeing:
                                   accounting, financial reporting and internal audit functions; integrity of
                                   ITW’s financial statements; compliance with legal and regulatory
                                   requirements; independence and performance of ITW’s independent public
                                   accountants; and performance of ITW’s internal audit function. Additional
                                   information on the Committee and its activities is set forth in the “Report of
                                   the Audit Committee” on page 26.

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Compensation Committee
Meetings in 2005:                 3
Members:                          William F. Aldinger (Chairman)
                                  Michael J. Birck
                                  Susan Crown
                                  Robert C. McCormack
                                  Robert S. Morrison
                                  James A. Skinner
Function:                         Establishes and oversees executive compensation policies;
                                  recommends to the other independent directors compensation for the
                                  Chief Executive Officer; approves compensation for executive
                                  officers; and makes recommendations on new incentive compensation
                                  and equity−based plans or amendments. Additional information on the
                                  Committee and its activities is set forth in the “Report of the
                                  Compensation Committee on Executive Compensation” on page 22.


Corporate Governance and Nominating Committee
Meetings in 2005:                 3
Members:                          Marvin D. Brailsford (Chairman)
                                  Susan Crown
                                  Don H. Davis, Jr.
                                  Robert S. Morrison
                                  James A. Skinner
Function:                         Identifies, evaluates and recommends director candidates; develops,
                                  administers and recommends corporate governance guidelines;
                                  oversees the evaluation of the Board and management; and makes
                                  recommendations as to Board committees and Board size.


Finance Committee
Meetings in 2005:                 1
Members:                          Robert C. McCormack (Chairman)
                                  William F. Aldinger
                                  Don H. Davis, Jr.
                                  Robert S. Morrison
                                  Harold B. Smith
Function:                         Reviews, evaluates and recommends to the Board, management’s
                                  proposals relating to ITW’s financing, investment portfolio and real
                                  estate investments.

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                            Corporate Governance Policies and Practices
General
       We have long believed that good corporate governance is important to assure that ITW is managed for the
long−term benefit of its stockholders. In that regard, we continuously review our corporate governance policies
and practices not only for compliance with the provisions of the Sarbanes−Oxley Act of 2002, the rules and
regulations of the SEC, and the listing standards of the NYSE but for good corporate governance as well. In
February 2006, we amended our Corporate Governance Guidelines to include a director election provision that
requires any nominee for director who fails to receive the affirmative vote of a majority of the votes cast to
tender his or her resignation. The Corporate Governance and Nominating Committee of the Board will consider
the resignation and recommend to the Board whether to accept or reject it. In considering the resignation, the
Committee will take into account such factors as the stated reasons why stockholders withheld votes for the
election of the director, the length of service and qualifications of the director, the director’s contributions to
ITW and our Corporate Governance Guidelines. The Board will consider the Committee’s recommendation, but
no director who failed to receive a majority vote will participate. We will disclose the results in a Form 8−K
within 90 days of the Annual Meeting.
      Our Board of Directors has adopted and annually reviews charters for our Audit, Compensation, and
Corporate Governance and Nominating Committees. We maintain a corporate governance section on our
website that includes the charters of these committees, ITW’s Corporate Governance Guidelines, ITW’s
Statement of Principles of Conduct (our code of business conduct and ethics for directors, officers and
employees) and ITW’s Code of Ethics for the Chief Executive Officer and key financial and accounting
personnel. In addition, we will promptly post any amendments to or waivers of the Code of Ethics on our
website. You can find this and other corporate governance information at www.itw.com. We will also provide
copies of this information upon request.

Stockholder Communications with Directors
      You may communicate with any of our directors or with the independent directors as a group by sending
an e−mail to independentdirectors@itw.com or by writing to the Independent Directors c/o the Corporate
Secretary at our address on the cover of this proxy statement.

Board Independence
      Our Board conducts an annual review as to whether each of our directors meets the applicable
independence standards of the NYSE. In accordance with the NYSE listing standards, our Board of Directors
has adopted categorical standards for director independence. A copy of ITW’s Categorical Standards for
Director Independence is attached as Appendix A. A director will not be considered independent unless the
Board of Directors determines that the director has no material relationship with ITW (directly or as a partner,
stockholder or officer of an organization that has a relationship with ITW).

                                                        10
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      The Board has determined that each of the current directors standing for re−election, except David B.
Speer, has no material relationship with ITW other than as a director and is independent within the meaning of
ITW’s Categorical Standards for Director Independence and the listing standards of the NYSE. In making its
independence determinations, the Board of Directors has broadly considered all relevant facts and
circumstances.

Director Candidates
      Our by−laws permit stockholders to nominate directors for consideration at an annual stockholder
meeting. The policy of the Corporate Governance and Nominating Committee is to consider a properly
submitted stockholder nomination for election as director. For a description of the process for submitting a
director candidate in accordance with ITW’s by−laws, see “Questions and Answers — How do I nominate a
director?” on page 3.
       Our directors play a critical role in guiding ITW’s strategic direction and oversee the management of
ITW. Board candidates are considered based upon various criteria, such as their broad−based business and
professional skills and experiences, a global business and social perspective, concern for the long−term interests
of the stockholders, and personal integrity and judgment. In addition, directors must have time available to
devote to Board activities and to enhance their knowledge of the global manufacturing environment.
Accordingly, we seek to attract and retain highly qualified directors who have sufficient time to attend to their
duties and responsibilities to ITW.
       The Corporate Governance and Nominating Committee or other members of the Board of Directors may
identify a need to add new members to the Board of Directors with specific criteria or simply to fill a vacancy
on the Board. At that time the Corporate Governance and Nominating Committee would initiate a search,
seeking input from Board members and senior management and, to the extent it deems appropriate, engaging a
search firm. An initial qualified candidate or a slate of qualified candidates would be identified and presented to
the Committee for its evaluation and approval. The Committee would then seek full Board endorsement of the
selected candidate(s).
      Assuming that a properly submitted stockholder recommendation for a director candidate has been
received, the Corporate Governance and Nominating Committee will evaluate that candidate by following
substantially the same process, and applying substantially the same criteria, as for candidates submitted by other
sources, but the Committee has no obligation to recommend the candidate for nomination.

                                          Director Compensation
Annual Retainer and Attendance Fees
       The annual retainer for non−employee directors is $40,000, the fee for each Board or committee meeting
attended is $2,000, and the annual fee for committee chairs is an additional $3,000, except for the Audit
Committee chair, whose annual fee is $10,000. Non−employee directors can defer receipt of all or a portion of
their annual retainer, chair and

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meeting fees until retirement or resignation. Deferred fee amounts are credited with interest at current rates.

Non−Officer Directors’ Fee Conversion Plan
       In order to link director compensation with stockholder interests, non−officer directors are given the
opportunity to elect annually to receive all or a portion of their annual retainer, chairman and meeting fees in an
equivalent value of ITW common stock pursuant to the Non−Officer Directors’ Fee Conversion Plan. The
number of ITW shares to be issued to a director is determined by dividing the dollar amount of the fee subject
to the election by the fair market value of ITW common stock on the date the fee otherwise would have been
paid in cash. A director can also elect to defer receipt of the shares, in which case the deferred shares are
credited as stock units to an account in the director’s name. The account receives additional credit for cash
dividends and is adjusted for stock dividends, splits, combinations or other changes in ITW common stock. The
stock units in a director’s account are distributed as shares of ITW common stock upon retirement, resignation
or a corporate change (as defined in the 1996 Stock Incentive Plan), with any fractional shares paid in cash. If
the stockholders approve the 2006 Stock Incentive Plan, the non−deferral provisions of the Non−Officer
Directors’ Fee Conversion Plan will be merged into the 2006 Stock Incentive Plan, which will continue to offer
the fee conversion opportunities described above.

Restricted ITW Common Stock
       In 1995, the stockholders approved a plan whereby a portion of each non−employee director’s
compensation includes the periodic grant of restricted ITW common stock, thereby directly linking another
element of director compensation with stockholder interests. ITW last granted restricted shares under the plan in
February 2004. At that time, each non−employee director of ITW received an award of 900 restricted shares,
which vested as to 450 shares on January 3, 2005 and January 3, 2006. As of January 4, 2006 there are no
restricted shares granted under the plan that have not vested. ITW intends to grant restricted shares to each
non−employee director under the 2006 Stock Incentive Plan, if the plan is approved by the stockholders.

Phantom ITW Stock
       To tie a further portion of their compensation to stockholder interests, non−employee directors of ITW
are awarded 1,000 units of phantom stock upon first becoming a director. The value of each unit equals the
market value of one share of ITW common stock. Additional units are credited to a director’s phantom stock
account in an amount equivalent to cash dividends paid on ITW stock. Accounts are adjusted for stock
dividends, stock splits, combinations or similar changes. A director is eligible for a cash distribution from his or
her account at retirement or upon approved resignation. When phantom stock is awarded, directors elect to
receive the distribution in either a lump sum or in up to ten annual installments. Directors receive the value of
their phantom stock accounts immediately upon a change of control.

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                                        Ownership of ITW Stock
Directors and Executive Officers
       The following table shows how much ITW common stock the directors, the named executive officers,
and all directors and executive officers as a group beneficially owned as of December 31, 2005. The “named
executive officers” are the Chief Executive Officer, the former Chief Executive Officer, the next four most
highly compensated executive officers, based on salary and bonus, who were serving at the end of the last fiscal
year and an additional person who would have qualified as one of our most highly compensated executive
officers had he been serving as an executive officer at the end of the last fiscal year.
       Beneficial ownership is a technical term broadly defined by the SEC to mean more than ownership in the
usual sense. In general, beneficial ownership includes any shares a director or executive officer can vote or
transfer and stock options that are exercisable currently or that become exercisable within 60 days. Except as
otherwise noted, the stockholders named in this table have sole voting and investment power for all shares
shown as beneficially owned by them.
       The number of shares beneficially owned by each non−employee director includes 900 shares (no shares
in the case of Mr. Skinner) of ITW common stock that were granted under the Directors’ Restricted Stock Plan,
which fully vested in January 2006. The number of the directors’ phantom stock units disclosed in the table
represents an equivalent number of shares of ITW common stock as of December 31, 2005. Phantom stock
units are not transferable and have no voting rights. The units are not included in the “percent of class”
calculation.

                                                       13
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                                                             Shares of Common
                                                                                                   Phantom            Percent
                                                                   Stock
                                                                                                                        of
              Name of Beneficial Owner                       Beneficially Owned                  Stock Units
                                                                                                                       Class
Directors (other than Executive Officers)
   William F. Aldinger                                                       7,158(1)                   1,092                *
   Michael J. Birck                                                         14,893(2)                   2,229                *
   Marvin D. Brailsford                                                      6,011(3)                   2,223                *
   Susan Crown                                                              12,500(4)                   2,247                *
   Don H. Davis, Jr.                                                         7,844(5)                   1,076                *
   Robert C. McCormack                                                  11,903,459(6)                   2,247              4.2%
   Robert S. Morrison                                                        4,849(7)                   1,032                *
   James A. Skinner                                                          1,000(8)                   1,004                *
   Harold B. Smith                                                      33,069,422(9)                      —              11.7%
Executive Officers
   W. James Farrell                                                      1,629,572(10)                     —                 *
   David B. Speer                                                          293,780(11)                     —                 *
   Frank S. Ptak                                                           872,637(12)                     —                 *
   Russell M. Flaum                                                        284,961(13)                     —                 *
   Thomas J. Hansen                                                        183,911(14)                     —                 *
   Hugh J. Zentmyer                                                        148,227(15)                     —                 *
   David T. Flood                                                          104,478(16)                     —                 *
Directors and Executive Officers as a Group (24 Persons)                36,389,708(17)                 13,150             12.9%


 *    Less than 1%

 (1) Includes (a) 100 shares owned by Mr. Aldinger’s spouse, as to which he disclaims beneficial ownership; and (b) 450 unvested
     restricted shares to which Mr. Aldinger has no investment power.
 (2) Includes 450 unvested restricted shares as to which Mr. Birck has no investment power.
 (3) Includes 450 unvested restricted shares as to which Mr. Brailsford has no investment power.
 (4) Includes (a) 2,000 shares owned by Ms. Crown’s spouse as to which she disclaims beneficial ownership; (b) 2,000 shares held
     in trusts of which Ms. Crown’s children are beneficiaries and as to which she disclaims beneficial ownership; and (c) 450
     unvested restricted shares as to which Ms. Crown has no investment power.
 (5) Includes 450 unvested restricted shares as to which Mr. Davis has no investment power.
 (6) Includes (a) 400 shares owned in a trust as to which Mr. McCormack shares voting and investment power with The Northern
     Trust Company; (b) 11,894,134 shares owned in twelve trusts as to which Messrs. McCormack and H. B. Smith and The
     Northern Trust Company are trustees and share voting and investment power; (c) 6,275 shares owned in a limited partnership in
     which Mr. McCormack owns 99% of the limited partnership units; and (d) 450 unvested restricted shares as to which
     Mr. McCormack has no investment power.
 (7) Includes 450 unvested restricted shares as to which Mr. Morrison has no investment power.
 (8) These shares were purchased by Mr. Skinner in February 2006.
 (9) Includes (a) 18,879,800 shares owned in twelve trusts as to which Mr. Smith shares voting and investment power with The
     Northern Trust Company and others; (b) 1,790,476 shares owned in ten trusts as to which he shares voting and investment
     power; (c) 11,894,134 shares owned in twelve trusts as to which Messrs. McCormack and H. B. Smith and The Northern Trust
     Company are trustees and share voting and investment power; (d) 463,795 shares owned in a revocable trust as to which
     Mr. Smith has sole voting and investment power; (e) 40,767 shares owned by a charitable foundation of which Mr. Smith is a
     director; and (f) 450 unvested restricted shares to which Mr. Smith has no investment power.
                                                               14
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       Mr. Smith’s address is c/o Corporate Secretary, Illinois Tool Works Inc., 3600 West Lake Avenue, Glenview, Illinois 60026.

(10)   Includes (a) 130,302 shares owned in a partnership as to which Mr. Farrell shares voting and investment power;
       (b) 67,848 shares owned in a revocable trust as to which Mr. Farrell has sole voting and investment power; (c) 20,488 shares
       owned by a charitable foundation of which Mr. Farrell is an officer; (d) 30,800 unvested restricted shares as to which
       Mr. Farrell has no investment power; (e) 7,141 shares allocated to Mr. Farrell’s account in the ITW Savings and Investment
       Plan; and (f) 1,335,069 shares covered by options exercisable within 60 days.
(11)   Includes (a) 4,400 unvested restricted shares as to which Mr. Speer has no investment power; (b) 882 shares allocated to
       Mr. Speer’s account in the ITW Savings and Investment Plan; and (c) 262,500 shares covered by options exercisable within
       60 days.
(12)   Includes 840,000 shares covered by options exercisable by Mr. Ptak within 60 days.
(13)   Includes (a) 4,400 unvested restricted shares as to which Mr. Flaum has no investment power; (b) 1,840 shares allocated to
       Mr. Flaum’s account in the ITW Savings and Investment Plan; and (c) 235,000 shares covered by options exercisable within
       60 days.
(14)   Includes (a) 4,400 unvested restricted shares as to which Mr. Hansen has no investment power; and (b) 171,750 shares covered
       by options exercisable within 60 days.
(15)   Includes (a) 3,685 unvested restricted shares as to which Mr. Zentmyer has no investment power; (b) 2,000 shares owned in a
       revocable trust as to which Mr. Zentmyer has sole voting and investment power; (c) 11,014 shares owned by Mr. Zentmyer’s
       spouse in a trust, as to which he disclaims beneficial ownership; (d) 325 shares held in a trust of which Mr. Zentmyer’s brother
       is the beneficiary and as to which he disclaims beneficial ownership (e) 7,906 shares allocated to Mr. Zentmyer’s account in the
       ITW Savings and Investment Plan; and (f) 120,000 shares covered by options exercisable within 60 days.
(16)   Includes (a) 2,970 unvested restricted shares as to which Mr. Flood has no investment power and (b) 85,000 shares covered by
       options exercisable within 60 days.
(17)   Includes 2,735,331 shares covered by options exercisable within 60 days.

Other Principal Stockholders
       This table shows, as of December 31, 2005, the only stockholders other than a director that we know to be
a beneficial owner of more than 5% of ITW common stock. We maintain a commercial banking relationship
with The Northern Trust Company and its wholly owned subsidiaries. The Northern Trust Company is a wholly
owned subsidiary of Northern Trust Corporation. Susan Crown, Robert C. McCormack and Harold B. Smith,
directors of ITW, are also directors of Northern Trust Corporation and The Northern Trust Company. The
commercial banking relationship between ITW and The Northern Trust Company may involve, but is not
strictly limited to, the following services: creating and maintaining deposit accounts, credit services, investment
banking services, payment and collection services, trade services, credit enhancement or payment guaranty,
acting as agent or fiduciary, consulting services, risk management services, and broker dealer services. In
addition, The Northern Trust Company serves as the trustee under ITW’s principal pension plans. The banking
and trustee relationships with The Northern Trust Company are conducted in the ordinary course
                                                          15
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of business on an arms−length basis. Banking and trustee fees paid to The Northern Trust Company by ITW
were approximately $1.57 million in 2005.

                          Name and Address of                                          Shares of Common Stock              Percent
                           Beneficial Owner                                              Beneficially Owned                of Class
The Northern Trust Company                                                                             40,803,012(1)           14.4%
50 South LaSalle Street
Chicago, IL 60675

Capital Research and Management Company                                                                  17,438,900(2)           6.2%
333 South Hope Street
Los Angeles, CA 90071


(1) The Northern Trust Company and its affiliates act as sole fiduciary or co−fiduciary of trusts and other fiduciary accounts that
    own an aggregate of 40,803,012 shares. They have sole voting power with respect to 8,086,747 shares and share voting power
    with respect to 31,981,074 shares. They have sole investment power with respect to 4,168,984 shares and share investment
    power with respect to 31,790,246 shares. In addition, The Northern Trust Company holds in other accounts, but does not
    beneficially own, 19,691,362 shares, resulting in aggregate holdings by The Northern Trust Company of 60,494,374 shares, or
    21.37%.
(2) Capital Research and Management Company, an investment advisor registered under Section 203 of the Investment Advisers
    Act of 1940, is deemed to be the beneficial owner of these shares as a result of acting as investment adviser to various investment
    companies registered under Section 8 of the Investment Company Act of 1940. It has sole voting power with respect to
    1,780,900 shares and shares voting power with respect to none of the shares. It has sole dispositive power with respect to all
    17,438,900 shares. This information was provided in a Schedule 13G filed with the SEC on February 10, 2006.



                                         Section 16(a) Beneficial Ownership
                                               Reporting Compliance
        Section 16(a) of the Securities Exchange Act of 1934 requires that ITW’s executive officers, directors
and greater than 10% stockholders file reports of ownership and changes of ownership of ITW common stock
with the SEC and the NYSE. Based on a review of copies of these reports provided to us during fiscal 2005 and
written representations from executive officers and directors, we believe that all filing requirements were met
during 2005, except that in August 2005, Jon C. Kinney, former Chief Financial Officer of ITW, was
inadvertently late in filing one Form 4 reporting shares withheld to cover taxes on the accelerated vesting of his
restricted shares upon retirement.
                                                        16
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                                                 Executive Compensation
        This table summarizes the compensation for the named executive officers.

                                               Summary Compensation Table
                                                                                                  Long−Term
                                                                                                 Compensation
                                                                                                    Awards
                                           Annual Compensation                  Restricted         Securities          All Other
      Name and                                                                    Stock           Underlying         Compensation
  Principal Position       Year          Salary(1)        Bonus(1)(2)           Awards(3)         Options(4)               (6)
W. James Farrell(7)         2005     $    1,189,800      $ 2,296,314          $          —                  —         $ 121,723
  Chairman and former
  Chief                      2004         1,186,308          2,288,000            7,776,038            423,069(5)          115,441
  Executive Officer          2003         1,098,085          2,112,000            9,287,600                 —              103,848
David B. Speer(7)            2005    $      605,769      $   1,387,500        $          —                  —          $    55,152
  President and Chief        2004           418,692            970,000            1,110,838            150,000              37,216
  Executive Officer          2003           333,496            644,620            1,326,800                 —               31,895
Frank S. Ptak(7)             2005    $      546,960      $   1,063,816        $          —                  —          $   111,098
  Former Vice
  Chairman                   2004           549,615          1,060,000            3,887,977            200,000               53,508
                             2003           509,221            979,200            4,643,800                 —                48,350
Russell M. Flaum             2005    $      346,338      $     658,476        $          —                  —          $     35,572
  Executive Vice
  President                  2004           345,462            670,000            1,110,838             40,000               29,920
                             2003           320,015            509,392            1,326,800                 —                28,235
Thomas J. Hansen             2005    $      326,600      $     594,412        $          —                  —          $     31,543
  Executive Vice
  President                  2004           325,646            574,620            1,110,838             75,000               29,261
                             2003           301,144            510,380            1,326,800                 —                27,886
Hugh J. Zentmyer             2005    $      319,692      $     600,325        $          —                  —          $     31,391
  Executive Vice
  President                  2004           318,874            577,200              930,295             40,000               27,955
                             2003           295,011            479,830            1,111,195                 —                26,272
David T. Flood               2005    $      290,338      $     550,368        $          —                  —          $     29,370
  Executive Vice
  President                  2004           288,231            548,800              749,835             40,000               26,342
                             2003           255,808            464,400              895,590                 —                24,680


(1) Actual salary or bonus earned. Includes amounts deferred by the executive under the Executive Contributory Retirement Income
    Plan or the Savings and Investment Plan.
(2) Amounts awarded under the Executive Incentive Plan are based on the executive’s base salary as of December 31 for that year
    and paid in the following year.
(3) The restricted stock awards granted to the named executive officers under our 1996 Stock Incentive Plan on January 2, 2003 are
    fully vested, and those granted on January 2, 2004 to the named executive officers vest in three equal installments on December
    16 in the years 2004 and 2005 and on December 18, 2006. An employee’s shares will vest only if he or she is actively employed
    with ITW on the vesting date, and, unless otherwise determined by the Compensation Committee, unvested shares will be
    forfeited upon retirement, death or disability. Each employee may exercise full voting rights and is entitled to receive all
    dividends and other distributions paid on the restricted stock from the date of the grant until the stock is forfeited or sold. The
    December 31, 2005 value of the unvested portion of the restricted stock awards for the named executive officers was:
    Mr. Farrell, $2,710,092; Mr. Speer, $387,156; Mr. Ptak, $0; Mr. Flaum, $387,156; Mr. Hansen, $387,156; Mr. Zentmyer,
    $324,243; and Mr. Flood, $261,330. The Compensation Committee determined that it would be appropriate to accelerate the
    vesting of 15,400 shares of restricted stock held by Mr. Ptak as of his retirement on December 28, 2005. Based on the closing
    price of ITW stock on that date, the shares had a value of $1,377,838. The restricted stock grants in January 2003 and

                                                                  17
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    2004 were in lieu of stock options that would have traditionally been granted in December 2002 and 2003, respectively.
(4) On December 7, 2005, the Compensation Committee approved stock option awards with a grant date of February 1, 2006. Since
    this grant is not effective until February 1, 2006 it is not represented in the Summary Compensation Table but will be reflected in
    next year’s table.
(5) Includes options granted as “restorative options”. A restorative option right applies to the options granted under the 1996 Stock
    Incentive Plan so long as the option holder is employed by ITW. This means that an option holder who delivers previously
    acquired shares of ITW common stock in payment of an option’s exercise price will be granted an additional option, sometimes
    referred to as a “restorative option”, which is subject to certain restrictions, to purchase a number of shares equal to the number
    of delivered shares.
(6) For 2005, represents company matching contributions to the Executive Contributory Retirement Income Plan or the Savings and
    Investment Plan and, for Mr. Ptak, $53,000 for vacation that was accrued but unused at the time of his retirement on
    December 28, 2005.
(7) Mr. Farrell relinquished his title as Chief Executive Officer, effective August 5, 2005, at which time Mr. Speer was elected Chief
    Executive Officer. In addition, Mr. Ptak retired as Vice Chairman, effective December 28, 2005.


     In the event of a corporate change (as defined in the 1996 Stock Incentive Plan), each executive officer’s
unvested restricted stock and stock options previously granted under the 1996 Stock Incentive Plan fully vest. In
addition, executives receive a cash payment under the Executive Incentive Plan immediately upon a corporate
change. The amount paid under the Executive Incentive Plan equals a portion of the maximum awards payable
under the Plan for that year based on the number of days in the year that have elapsed as of the date of the
corporate change. Executives may also request a distribution of 90% of their Executive Contributory Retirement
Income Plan account within 18 months of a corporate change, forfeiting the remaining 10% of the account.

                                               Option Exercises in 2005 and
                                               Year−End 2005 Option Values
      This table provides information regarding the exercise of options during 2005 and options outstanding at
the end of the year for the named executive officers. The “value realized” is calculated using the difference
between the option exercise price and the price of ITW common stock on the date of exercise multiplied by the
number of shares acquired upon exercise. The “value of unexercised in−the−money options at fiscal year−end
2005” is calculated using the difference between the option exercise price and $87.99 (the closing price of ITW
stock on December 30, 2005, the last trading day of the year) multiplied by the number of shares underlying the
option. An option is in−the−money if the market value of ITW common stock is greater than the option’s
exercise price.
                                                        18
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                                                          Number of Securities
                                                         Underlying Unexercised            Value of Unexercised
                                                           Options at Fiscal             In−the−Money Options at
                           Shares                           Year−End 2005                  Fiscal Year−End 2005
                          Acquired
                                           Value
                             on
          Name            Exercise       Realized      Exercisable   Unexercisable    Exercisable     Unexercisable
W. James Farrell                 —               —      1,335,069         300,000     $ 34,336,380               —
David B. Speer                   —               —        262,500         112,500        6,521,025               —
Frank S. Ptak                60,000     $ 3,590,403       840,000              —        18,236,350               —
Russell M. Flaum                 —               —        235,000          30,000        6,521,025               —
Thomas J. Hansen                 —               —        171,750          56,250        4,171,095               —
Hugh J. Zentmyer             24,000       1,365,017       120,000          30,000        3,213,900               —
David T. Flood               14,000         402,520        85,000          30,000        2,076,625               —



                                                Retirement Plans

Retirement Accumulation Plan
       The ITW Retirement Accumulation Plan is our principal defined benefit plan. It covers approximately
22,000 domestic business unit employees, including executive officers. Upon retirement, participants receive
benefits based on years of plan participation and average compensation for the five highest years out of the last
ten years of employment. For the named executive officers, compensation includes salary and bonus shown in
the Summary Compensation Table. As of January 1, 2001, the plan was amended to provide a defined
lump−sum amount at retirement that is convertible to an annuity. Persons who were age 50 or older before
January 1, 2001, and had at least five years of plan participation, will receive a benefit that is no less valuable
than that provided under the prior plan formula, including early retirement subsidy. Because the Internal
Revenue Code imposes limits on those plan benefits, the Board has established a supplemental plan that
provides for payments to certain executives equal to benefits that would be paid but for these limitations. The
tables below show the estimated annual benefits to be paid under the pension plan and supplemental plan to an
individual who (1) was age 59 on December 31, 2005 (the average age of all of the executive officers who had
reached age 50 on or before December 31, 2000) (Table I) and (2) reached age 48 on December 31, 2005 (the
average age of all the executive officers who were younger than age 50 on December 31, 2000) (Table II) and,
in both cases, who continues to participate in the plans through the plans’ normal retirement age of 65,
assuming the plan provisions in effect on December 31, 2005 continue until that date. For years of participation
prior to 2001, benefits have been computed based on the pension plan formula then in effect and the transition
provisions in the amended plan.

                                                        19
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                                                              Table I
                                                  Estimated Annual Normal Retirement Benefits (Current Dollars)(1)
                                                             Years of Service as of December 31, 2011(2)
         Compensation               15            20             25              30             35            40             45
$   600,000                     $ 135,235     $ 184,800      $ 220,910      $ 265,092      $ 285,927     $ 306,761       $ 327,596
      850,000                     193,379        264,168        316,402         379,682        409,198       438,713        468,229
    1,100,000                     251,523        343,536        411,893         494,272        532,469       570,665        608,862
    1,350,000                     309,667        422,904        507,385         608,862        655,740       702,617        749,495
    1,600,000                     367,812        502,272        602,877         723,452        779,011       834,569        890,128
    2,000,000                     460,842        629,261        755,663         906,796        976,244     1,045,693      1,115,141
    2,500,000                     577,131        787,996        946,646       1,135,976      1,222,786     1,309,597      1,396,407
    3,000,000                     693,419        946,732      1,137,629       1,365,155      1,469,328     1,573,501      1,677,673
    3,500,000                     809,708      1,105,468      1,328,613       1,594,335      1,715,870     1,837,405      1,958,939
    4,000,000                     925,996      1,264,204      1,519,596       1,823,515      1,962,412     2,101,309      2,240,206



                                                             Table II
                                                 Estimated Annual Normal Retirement Benefits (Current Dollars)(1)
                                                            Years of Service as of December 31, 2022(2)
        Compensation              17              20            25               30             35            40             45
$   600,000                   $ 165,191       $ 185,053     $ 204,131       $ 250,755      $ 265,476     $ 280,196       $ 294,917
      850,000                    236,090         264,592       292,024          358,481        379,740       400,999        422,258
    1,100,000                    306,988         344,131       379,917          466,206        494,004       521,802        549,600
    1,350,000                    377,886         423,670       467,811          573,932        608,268       642,605        676,941
    1,600,000                    448,784         503,209       555,704          681,657        722,532       763,407        804,282
    2,000,000                    562,222         630,471       696,333          854,018        905,355       956,692      1,008,029
    2,500,000                    704,018         789,549       872,120        1,069,468      1,133,883     1,198,297      1,262,711
    3,000,000                    845,815         948,627     1,047,906        1,284,919      1,362,411     1,439,902      1,517,394
    3,500,000                    987,611       1,107,705     1,223,693        1,500,370      1,590,939     1,681,508      1,772,077
    4,000,000                  1,129,408       1,266,783     1,399,480        1,715,821      1,819,467     1,923,113      2,026,760



(1) Calculations of benefits in terms of 2005 dollars are based on 4% annual pay increases before and after 2001, 4% annual
    increases in Social Security Covered Compensation from 2005, and a 30−year Treasury Rate (used to convert defined lump sum
    benefits into an annuity) of 4.68% (published rate for October 2005).
(2) Actual years of participation as of December 31, 2005 for the named executive officers were as follows: Mr. Farrell, 40.5 years;
    Mr. Ptak, 30.1 years; Mr. Flaum, 19.0 years; Mr. Hansen, 25.3 years; and Mr. Zentmyer, 19.0 years (for whom Table I is
    applicable); Mr. Speer, 27.5 years; and Mr. Flood, 26.1 years (for whom Table II is applicable).


Executive Contributory Retirement Income Plans
       Certain of our executives participate in the ITW 1993 Executive Contributory Retirement Income Plan
(the “1993 ECRIP”), which is a supplemental retirement plan pursuant to which these executives annually may
elect to defer a portion of their salary and bonus, a percentage of which may be matched by ITW per the
provisions of the ITW Savings and Investment Plan. Amounts deferred and matching contributions under the
1993 ECRIP for the named executive officers are included in the salary and bonus columns of the Summary
Compensation Table on page 17, as appropriate. Account balances are paid out upon the occurrence of certain
events, such as retirement, death or disability. In addition, certain of our executives participated in the ITW
1985 Executive Contributory Retirement
                                                          20
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Income Plan (the “1985 ECRIP”), the predecessor plan to the 1993 ECRIP, which functioned similarly to the
1993 ECRIP. We pay interest on the account balances at rates specified in the 1993 ECRIP and 1985 ECRIP.
Interest credited to the 1993 ECRIP and 1985 ECRIP accounts for the named executive officers during 2003,
2004 and 2005, as well as accumulated amounts of interest since the inception of the 1993 ECRIP and 1985
ECRIP, are as follows:
                                                                                                                        Accumulated
Name                                                                         2003           2004            2005          Interest
W. James Farrell                                                          $ 277,147      $ 346,094       $ 401,659      $ 1,837,288
David B. Speer                                                              121,055        148,654         179,995           886,938
Frank S. Ptak                                                               193,870        223,461         244,611         1,444,415
Russell M. Flaum                                                             77,581         89,916          98,399           549,353
Thomas J. Hansen                                                            120,142        140,442         155,369           866,443
Hugh J. Zentmyer                                                             90,793        100,017         105,753           634,509
David T. Flood                                                               73,654         89,485         102,652           507,652

       In addition, Mr. Farrell participated in the ITW 1982 Executive Contributory Retirement Income Plan
(the “1982 ECRIP”), which, unlike the 1993 ECRIP and 1985 ECRIP, was a defined benefit plan pursuant to
which certain executives made contributions over a five−year period and receive fixed annual payments upon
retirement, death or disability. Under the 1982 ECRIP, Mr. Farrell is eligible to receive an annual benefit of
$113,529 for 15 years beginning at the normal retirement age of 65. No interest is paid under this plan.


                                      Equity Compensation Plan Information
     The following table provides information as of December 31, 2005 about ITW’s existing equity
compensation plans.
                                                                                                                      (c)
                                                                                                             Number of securities
                                                             (a)                          (b)              remaining available for
                                                   Number of securities           Weighted−average          future issuance under
                                                     to be issued upon             exercise price of         equity compensation
                                                  exercise of outstanding            outstanding               plans (excluding
                                                                                       options,
                                                  options, warrants and                                     securities reflected in
                                                                                      warrants
              Plan Category                                rights                     and rights                 column (a))
Equity compensation plans approved by
  security holders                                              10,285,382        $            67.53                       7,177,294(2)
Equity compensation plans not approved by
  security holders                                                  16,308(1)                     —                           22,236(3)
Total                                                           10,301,690        $            67.53                       7,199,530


(1) Represents shares credited to directors’ accounts for annual retainer and meeting fees deferred pursuant to the Non−Officer
    Directors’ Fee Conversion Plan. A description of the Plan can be found on page 12.
(2) These shares remain available for issuance under the 1996 Stock Incentive Plan. This amount excludes 147,812 shares of
    unvested restricted stock granted pursuant to the 1996 Stock Incentive Plan and 3,600 shares of unvested restricted stock granted
    pursuant to the Directors’ Restricted Stock Plan. If these shares do not vest, they will no longer constitute shares outstanding and
    will be available for future issuance under the terms of the respective plans.
(3) These shares remain available for issuance under the Non−Officer Directors’ Fee Conversion Plan.

                                                                    21
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                               Report of the Compensation Committee
                                    on Executive Compensation
        The Compensation Committee of the Board of Directors is composed of six directors who meet the
independence requirements of the New York Stock Exchange. The Committee administers ITW’s compensation
plans for key employees, including the Executive Incentive Plan and the 1996 Stock Incentive Plan. The
Committee also approves compensation levels for executive officers and recommends the Chief Executive
Officer’s compensation for approval by the independent Board members. In making its executive compensation
decisions and recommendations, the Committee considers management’s contribution to ITW’s long−term
growth. One long−term performance factor that the Committee considers is ITW’s total stockholder return,
which is measured by capital appreciation and reinvested dividends. For the five− and ten−year periods ending
December 31, 2005, the compound annual stockholder rate of return was 9.6% and 12.9%, respectively. For the
same periods, the rate of return on the Standard & Poor’s 500 Index was 0.5% and 9.1%, respectively, and the
rate of return on the Standard & Poor’s Industrial Machinery Index was 11.0% and 11.5%, respectively.
       Compensation for executive officers is composed of base salary, a cash bonus based on performance, and
stock incentives. In addition, executive officers participate in ITW retirement plans, including the Retirement
Accumulation Plan and the Executive Contributory Retirement Income Plans, which are discussed in the
Executive Compensation section of this proxy statement. The Committee believes that the stock incentive and
cash bonus components further align the executive officers’ performance with stockholder interests. The
Committee’s philosophy is to review all components of compensation, including base salary, bonus and equity
incentives, and to provide a total compensation package that is competitive against a group of comparable
industrial companies.
      Base Salary. In establishing and recommending base salaries for the Chief Executive Officer and other
executive officers, the Committee considers compensation information of a peer group of comparable industrial
companies. This peer group includes some of the same companies as the S&P Industrial Machinery and the
S&P Industrial Conglomerates Indices used for the Company Performance graphs on pages 25 and 26. In
determining base salary, the Committee considers the executive officer’s past performance and potential future
performance, as well as ITW’s net income and the operating income of the business units that the officer
oversees. The Committee’s objective is to target base salaries of the Chief Executive Officer and the other
executive officers at the 50th percentile of the peer group.
       Bonus. Executive officers receive annual cash bonuses under the Executive Incentive Plan based on
predetermined financial and non−financial objectives, the criteria for which have been approved by ITW
stockholders. This Plan is Section 162(m) compliant. Executive officers may elect to take up to half of their
annual cash bonus in ITW common stock. The maximum bonus opportunities range from 70% to 200% of base
salary, and as a result, a greater percentage of executive total compensation is at risk. The Chief Executive
Officer, Vice Chairman and certain executive officers can earn half of the maximum bonus opportunity if
ITW’s net income is at least 120% of targeted plan. The other half of the maximum bonus opportunity relates to
the individual’s performance measured against predetermined management goals. The Chairman’s
non−financial goals in 2005 included

                                                      22
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broad−based organizational succession planning and transition for Chief Executive Officer and other major staff
functions. The Chief Executive Officer’s non−financial goals in 2005 included working with the Chairman on
transition to the Chief Executive Officer position, assisting new Executive Vice Presidents to assure smooth
transitions to their new roles, and work with all Executive Vice Presidents in developing long range plans for
their business groups. The 2005 non−financial goals of the Vice Chairman and certain other executive officers
related to such things as succession planning, cost reduction targets, market penetration, acquisition planning
and a variety of other objectives specifically related to the individual unit’s performance. For the Executive
Officers, one half of the maximum bonus opportunity is based on the income performance of operating units
under the manager’s control, referred to as the “P” factor. This is a pre−tax income amount at the business unit
level and a net income target at the corporate level. The other half of the maximum bonus opportunity is based
on the manager’s achievement of personal objectives or “O” factors. For 2005, the average bonus received by
executive officers was approximately 93.7% of the maximum award. The average award received by the named
executive officers was approximately 94.0% of the maximum award.
       Stock Incentives. The Chief Executive Officer, executive officers and certain other key employees
participate in the 1996 Stock Incentive Plan, principally through the grant of stock options and restricted stock.
The magnitude of a stock incentive award is based on the executive officer’s position, performance, and ability
to influence ITW’s long−term growth and profitability over a period of years. Options are priced at fair market
value on the date of grant.
       In January 2004, the Committee granted restricted stock to certain key domestic employees and later in
2004 returned to its historical approach of granting stock options. The Committee believes that these grants are
a further effective incentive for executive officers to create value for stockholders. On December 7, 2005, the
Committee approved stock option awards with a grant date of February 1, 2006 to the Chief Executive Officer,
executive officers and certain other key employees. Since this grant was not effective until February 1, 2006, it
is not represented in the Summary Compensation Table this year but will be reflected in next year’s table.
       Stock Ownership Guidelines. The Board of Directors and the Compensation Committee have
established stock ownership guidelines to further the objective of aligning the interests of executive officers and
directors with stockholder interests. These guidelines apply to elected and appointed corporate officers, as well
as to non−employee directors. Recommended stock ownership as a multiple of executive officers’ base salaries
and of directors’ annual retainers is as follows: Chief Executive Officer, five times; Vice Chairman and
Executive Vice Presidents, three times; Senior Vice Presidents, two times; Vice Presidents, one time; and
non−employee directors, four times. The Committee recommends that an executive officer or non−employee
director achieve the applicable ownership level within five years. As of December 31, 2005, all officers and
directors who have been in their position for five or more years had satisfied the guidelines.
      Deductibility. Internal Revenue Code Section 162(m) limits the deductibility of compensation in excess
of $1,000,000 paid to each of the named executive officers employed

                                                        23
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at year end. Certain performance−based compensation and deferred compensation is not included in
compensation counted for purposes of the limit. The Committee recognizes its obligation to reward
performance that increases stockholder value and exercises its discretion in determining whether or not to
conform ITW’s executive compensation plans to the approach provided for in the Code.


                                             William F. Aldinger, Chairman
                                             Michael J. Birck
                                             Susan Crown
                                             Robert C. McCormack
                                             Robert S. Morrison
                                             James A. Skinner

                                                       24
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                                       Company Performance
        Shown below are two graphs covering a five−year comparison and a ten−year comparison of cumulative
total returns for ITW, the Standard & Poor’s (S&P) 500 Composite Index, the S&P Industrial Conglomerates
Index and the S&P Industrial Machinery Index. The graphs assume an investment of $100 on December 31,
2000 for the five−year period and December 31, 1995 for the ten−year period, including reinvestment of
dividends. Total returns are based on market capitalization.

                                         Five−Year Performance




                                                    25
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                                            Ten−Year Performance




                                     Report of the Audit Committee
        The Audit Committee of the Board of Directors is composed of five independent directors, as defined in
the listing standards of the New York Stock Exchange. In addition, the Board of Directors has determined that
all Audit Committee members are “financially literate” and that Messrs. Aldinger, Birck, Davis and Skinner
meet the Securities and Exchange Commission criteria of “audit committee financial expert”. The Audit
Committee operates under a written charter adopted by the Board of Directors, which was reviewed by the
Committee in February 2006.
       The Committee is responsible for providing oversight to ITW’s financial reporting process through
periodic meetings with ITW’s independent public accountants, internal auditors and management in order to
review accounting, auditing, internal control and financial reporting matters. The Committee is also responsible
for assisting the Board in overseeing: (a) the integrity of ITW’s financial statements; (b) ITW’s compliance with
legal and regulatory requirements; (c) the independent public accountants’ qualifications, independence and
performance; and (d) the performance of ITW’s internal audit function. ITW’s management is responsible for
the preparation and integrity of the financial reporting information and related systems of internal controls. The
Committee, in carrying out its role, relies on ITW’s senior management, including senior financial management,
and ITW’s independent public accountants.

                                                       26
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      We have reviewed and discussed with senior management the audited financial statements included in the
2005 Annual Report to Stockholders. Management has confirmed to the Committee that the financial statements
have been prepared in conformity with generally accepted accounting principles.
       We have reviewed and discussed with senior management their assertion and opinion regarding internal
controls included in the 2005 Annual Report to Stockholders as required by Section 404 of the Sarbanes−Oxley
Act of 2002. Management has confirmed to the Committee that internal controls over financial reporting have
been appropriately designed, and are operating effectively to prevent or detect any material financial statement
misstatements. We have also reviewed and discussed with Deloitte & Touche LLP, ITW’s independent public
accountants, its audit and opinion regarding ITW’s internal controls as required by Section 404, which opinion
is included in the 2005 Annual Report to Stockholders.
      We have reviewed and discussed with Deloitte & Touche LLP the matters required to be discussed by the
Statement on Auditing Standards No. 61 (Communications with Audit Committee) under which Deloitte &
Touche LLP must provide us with additional information regarding the scope and results of its audit of ITW’s
financial statements. This information includes: (1) Deloitte & Touche LLP’s responsibility under generally
accepted auditing standards; (2) significant accounting policies; (3) management judgments and estimates;
(4) any significant audit adjustments; (5) any disagreements with management; and (6) any difficulties
encountered in performing the audit.
      We have received from Deloitte & Touche LLP a letter providing the disclosures required by
Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) with respect
to any relationships between Deloitte & Touche LLP and ITW that in its professional judgment may reasonably
be thought to bear on independence. Deloitte & Touche LLP has discussed its independence with us, and has
confirmed in the letter that, in its professional judgment, it is independent of ITW within the meaning of the
federal securities laws.
      The Committee also discussed with ITW’s internal auditors and independent public accountants the
overall scope and plans for their respective audits. The Committee meets periodically with the internal auditors
and independent public accountants, with and without management present, to discuss the results of their
examinations, their evaluations of ITW’s internal controls, and the overall quality of ITW’s financial reporting.
       Based on the reviews and discussions described above, we have recommended to the Board of Directors
that the audited financial statements included in ITW’s 2005 Annual Report to Stockholders be included in
ITW’s Annual Report on Form 10−K filed with the Securities and Exchange Commission for the year ended
December 31, 2005.


                                             Don H. Davis, Jr., Chairman
                                             William F. Aldinger
                                             Michael J. Birck
                                             Marvin D. Brailsford
                                             James A. Skinner

                                                       27
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                    Proposal to Amend our Restated Certificate of Incorporation
       On March 6, 2006, our Board of Directors authorized a two−for−one split of our common stock, to be
effected in the form of a stock dividend of one share for each share outstanding on the record date, subject to
stockholder approval of an increase in the number of authorized shares of our common stock. Without an
increase, there would be an insufficient number of shares to effect the stock split. Accordingly, our Board of
Directors recommends that action be taken by stockholders to amend our Restated Certificate of Incorporation
to increase the number of authorized shares of common stock from 350,000,000 to 700,000,000 shares.
      The amendment to the first paragraph of Article Fourth of our Restated Certificate of Incorporation
adopted by the Board of Directors, which stockholders are being asked to approve, reads as follows:
       “FOURTH.

       (1) Authorized Shares. The total number of shares of stock of all classes which the corporation shall have
       authority to issue is seven hundred million three hundred thousand (700,300,000), of which three
       hundred thousand (300,000) shall be shares of Preferred Stock, without par value, and seven hundred
       million (700,000,000) shall be shares of Common Stock, par value $.01 per share.”

       As of March 7, 2006, 282,968,754 shares of the 350,000,000 authorized shares of our common stock
were issued and outstanding, leaving insufficient shares available to effect a two−for−one stock split. Approval
of the proposed amendment, after giving effect to the stock split, would result in there being 565,937,508 shares
of our common stock issued and outstanding (based on the number of outstanding shares on March 7, 2006).
Accordingly, 134,062,492 shares of our common stock would remain available for future issuance; however,
assuming that our stockholders approve the proposed 2006 Stock Incentive Plan at the Annual Meeting,
70,000,000 of these shares would be reserved for issuance under that Plan, leaving 64,062,492 shares
unreserved and available for future issuance. As of March 7, 2006, there were no shares of our preferred stock
issued and outstanding.
       The additional shares of common stock sought by the amendment will be available for issuance without
further action by stockholders unless stockholder action is required by applicable law or the rules of any stock
exchange on which our securities may then be listed. The holders of our common stock have no preemptive
rights to subscribe for or to acquire any additional issues of common stock or securities convertible into or
entitling the holder to purchase shares of common stock.
      The NYSE currently requires specific stockholder approval as a prerequisite to listing shares in several
instances, including an acquisition transaction in which the issuance of shares could result in an increase of 20%
or more in the number of shares of common stock outstanding.
      We intend to apply for listing on the New York Stock Exchange and the Chicago Stock Exchange of the
additional shares of common stock to be issued in connection with the stock split.
                                                      28
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       Our Board of Directors believes that the proposed increase in the number of authorized shares of common
stock is in the best interests of ITW and its stockholders. The Board anticipates that the increase in the number
of outstanding shares of common stock as a result of the stock split may place the market price of our common
stock in a range more attractive to investors and may result in a broader market for the stock. In addition, our
Board of Directors believes that we should have sufficient authorized but unissued shares for issuance in
connection with future employee benefit programs, mergers, acquisitions, and other corporate purposes. In
many of these situations prompt action may be required, which would not permit seeking stockholder approval
in a timely fashion to authorize additional shares for the specific transaction. Although the additional shares of
common stock would provide future flexibility, other than for purposes of the stock split, we have no present
plans for their use.
       The reason for seeking an increase in the number of authorized shares of common stock is not for
anti−takeover purposes. Nevertheless, securities rules require disclosure of charter and by−law provisions that
could have an anti−takeover effect. Our Restated Certificate of Incorporation contains the following provisions:
(1) the Board of Directors has the authority to issue one or more series of preferred stock up to a maximum of
300,000 shares; (2) stockholders may not take action by written consent; (3) a special meeting of stockholders
may only be called by the chairman, the president, or a majority of the Board of Directors; and (4) certain
business combinations require approval by a two−thirds vote of the stockholders. These provisions could permit
the Board of Directors to place stock in friendly hands, delay or deter or otherwise make more difficult a
takeover of ITW. While permitted under Delaware law, our charter and by−laws do not provide stockholders
with cumulative voting.
       To effect the two−for−one stock split, payable in the form of a stock dividend, the number of authorized
shares of common stock must be increased. In the opinion of the Board of Directors, such an increase is in the
best interests of stockholders.
       If adopted, the amendment to Article Fourth of our Restated Certificate of Incorporation will be effective
at the close of business on the date of filing the amendment to our Restated Certificate of Incorporation with the
Delaware Secretary of State. We anticipate that the filing will occur on May 9, 2006. Stockholders of record at
the close of business on May 18, 2006 would receive an additional stock certificate, par value $.01 per share,
representing one additional share of our common stock for each share held. Stockholders should retain
certificates issued prior to those dates, and not return them to us or our transfer agent, as these certificates would
continue to represent the same number of shares shown on the certificate. We anticipate that certificates
representing additional shares to be issued to entitled stockholders would be mailed on or about May 25, 2006.

                        The Board of Directors recommends that you vote “FOR” the
                          amendment of our Restated Certificate of Incorporation

                                                         29
Table of Contents


                                Approval of the Illinois Tool Works Inc.
                                      2006 Stock Incentive Plan
       The Board of Directors has approved, subject to stockholder approval, the Illinois Tool Works Inc. 2006
Stock Incentive Plan (the “2006 Stock Incentive Plan”) as an amendment and restatement of the Illinois Tool
Works Inc. 1996 Stock Incentive Plan (the “1996 Plan”). The Board believes that the approval of the 2006
Stock Incentive Plan is in the best interests of ITW and its stockholders. In the Board’s view, the 2006 Stock
Incentive Plan is an important tool in ensuring the highest level of performance from ITW’s key employees and
non−employee directors by providing them with an opportunity to acquire an ownership interest in ITW.
       The 2006 Stock Incentive Plan is a stock−based compensation plan that provides for grants of stock
options, stock awards, performance units, restricted stock units and stock appreciation rights to key employees
and non−employee directors. The Plan is intended to encourage key employees and non−employee directors to
have a greater financial investment in ITW through ownership of our common stock. The 2006 Stock Incentive
Plan also is intended to incorporate by merger the non−deferral provisions of the Illinois Tool Works Inc.
Non−Officer Directors’ Fee Conversion Plan approved by the Board on February 19, 1999 and amended
December 15, 2000, and to succeed the Directors’ Restricted Stock Plan approved by stockholders at the annual
meeting on May 5, 1995. If the stockholders approve the 2006 Stock Incentive Plan, (i) no further grants of
restricted shares will be made under the Directors’ Restricted Stock Plan, and (ii) any share purchases and
issuances previously made pursuant to the Directors’ Fee Conversion Plan will thereafter be made pursuant to
the 2006 Stock Incentive Plan. No awards shall be made under the 2006 Stock Incentive Plan unless it is
approved by stockholders.
      The following summary of the 2006 Stock Incentive Plan describes the material features of the plan;
however, it is not complete and, therefore, you should not rely solely on it for a detailed description of every
aspect of the plan. The full text of the plan document, is available on the SEC’s website (www.sec.gov) as an
appendix to this proxy statement. We will also provide copies of the Plan upon request. Stockholders are
encouraged to review the plan document carefully.

DESCRIPTION OF THE 2006 STOCK INCENTIVE PLAN
      General. The Compensation Committee administers the 2006 Stock Incentive Plan, determines the key
employees and non−employee directors who will participate in the Plan and receive awards, and determines the
timing and amount of awards and the specific provisions of award agreements which may include, for example,
provisions for the forfeiture of an award if the participant competes with ITW or engages in other conduct that
adversely affects ITW, and provisions allowing acceleration of exercisability or the lapse of restrictions in the
event of death, disability, retirement or other specified event. The number of key employees and non−employee
directors who will participate in the future, and the amounts of any awards, cannot now be determined. With
respect to the prior plans, on March 1, 2006, approximately 523 key employees were eligible to participate in
the 1996 Plan and all non−

                                                        30
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ITW_proxy

  • 1. FORM DEF 14A ILLINOIS TOOL WORKS INC − ITW Filed: March 28, 2006 (period: May 05, 2006) Official notification to shareholders of matters to be brought to a vote (Proxy)
  • 2. Table of Contents OMB APPROVAL OMB Number: 3235−0059 Expires: January 31, 2008 Estimated average burden hours per response 14 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 14A Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant x Filed by a Party other than the Registrant o Check the appropriate box: o Preliminary Proxy Statement o Confidential, for Use of the Commission Only (as permitted by Rule 14a−6(e)(2)) x Definitive Proxy Statement o Definitive Additional Materials o Soliciting Material Pursuant to §240.14a−12 ILLINOIS TOOL WORKS INC. (Name of Registrant as Specified In Its Charter) (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): x No fee required. o Fee computed on table below per Exchange Act Rules 14a−6(i)(4) and 0−11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0−11 (set forth the amount on which the filing fee is calculated and state how it was determined): 4) Proposed maximum aggregate value of transaction: 5) Total fee paid: o Fee paid previously with preliminary materials. o Check box if any part of the fee is offset as provided by Exchange Act Rule 0−11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: 2) Form, Schedule or Registration Statement No.:
  • 3. 3) Filing Party: 4) Date Filed: Persons who are to respond to the collection of information contained in this form are not required to respond unless the SEC 1913 (11−01) form displays a currently valid OMB control number.
  • 4. Table of Contents Illinois Tool Works Inc. 3600 West Lake Avenue Glenview, Illinois 60026 Notice of Annual Meeting of Stockholders Friday, May 5, 2006 3:00 P.M. The Northern Trust Company 50 South LaSalle Street Chicago, Illinois ITW is holding its 2006 Annual Meeting for the following purposes: 1. To elect ten directors for the upcoming year; 2. To approve the amendment of our Restated Certificate of Incorporation to increase our authorized shares; 3. To approve the Illinois Tool Works Inc. 2006 Stock Incentive Plan; 4. To ratify the appointment of Deloitte & Touche, LLP as ITW’s independent public accountants; and 5. To consider stockholder proposals, if presented at the Annual Meeting. The Board of Directors recommends that you vote FOR each of the director nominees; FOR the amendment of our Restated Certificate of Incorporation; FOR the approval of the 2006 Stock Incentive Plan; FOR the ratification of the appointment of Deloitte & Touche LLP as ITW’s independent public accountants for 2006; and AGAINST each of the stockholder proposals. Stockholders of record on March 7, 2006 are entitled to vote. It is important that your shares are represented at the Annual Meeting whether or not you plan to attend. To be certain that your shares are represented, please sign, date and return the enclosed proxy card as soon as possible or vote by telephone or the internet by following the instructions on the proxy card. You may revoke your proxy at any time before it is voted at the Annual Meeting. Our Annual Report for 2005 is enclosed. By Order of the Board of Directors, James H. Wooten, Jr. Secretary March 28, 2006
  • 5. Illinois Tool Works Inc. Proxy Statement Table of Contents Page Questions and Answers 1 Election of Directors 5 Board of Directors and Its Committees 8 Corporate Governance Policies and Practices 10 Director Compensation 11 Ownership of ITW Stock 13 Section 16(a) Beneficial Ownership Reporting Compliance 16 Executive Compensation 17 Equity Compensation Plan Information 21 Report of the Compensation Committee on Executive Compensation 22 Company Performance 25 Report of the Audit Committee 26 Proposal to Amend our Restated Certificate of Incorporation 28 Approval of the Illinois Tool Works Inc. 2006 Stock Incentive Plan 30 Ratification of the Appointment of Independent Public Accountants 35 Stockholder Proposal — China Business Principles for Rights of Workers in China 37 Stockholder Proposal — Director Election Majority Vote Standard 40 Categorical Standards for Director Independence A−1 Annual Report on Form 10−K You may review and download a copy of ITW’s Annual Report on Form 10−K for the year ended December 31, 2005, including schedules that we filed with the Securities and Exchange Commission by accessing our website, www.itw.com, or you may request a paper copy by writing to: James H. Wooten, Jr., Secretary, Illinois Tool Works Inc., 3600 West Lake Avenue, Glenview, Illinois 60026. This proxy statement and form of proxy are first being sent to stockholders on or about March 28, 2006.
  • 6. Table of Contents Questions and Answers Following are questions often asked by stockholders of publicly held companies. We hope that the answers will assist you in casting your vote. What am I voting on? We are soliciting your vote on: 1. The election of ten directors for the upcoming year; 2. The approval of the amendment of our Restated Certificate of Incorporation; 3. The approval of the Illinois Tool Works Inc. 2006 Stock Incentive Plan; 4. The ratification of the appointment of Deloitte & Touche, LLP as ITW’s independent public accountants for 2006; and 5. Stockholder proposals, if presented at the Annual Meeting. Who may vote? Stockholders at the close of business on March 7, 2006, the record date, may vote. On that date, there were 282,968,754 shares of ITW common stock outstanding. How many votes do I have? Each share of ITW common stock that you own entitles you to one vote. How do I vote? You may vote your shares in one of the following four ways: 1. By mail: Complete the proxy card and sign, date and return it in the enclosed envelope; 2. By telephone: Call the toll−free number on the proxy card, enter the holder account number and the proxy access number from the proxy card, and follow the recorded instructions; 3. By internet: Go to the website listed on the proxy card, enter the holder account number and the proxy access number from the proxy card, and follow the instructions provided; or 4. In person: Attend the Annual Meeting, where ballots will be provided. If you hold your shares through a bank or broker that does not offer telephone or internet voting, please complete and return your proxy card by mail.
  • 7. Table of Contents How does discretionary voting authority apply? If you sign, date and return your proxy card, your vote will be cast as you direct. If you do not indicate how you want to vote, you give authority to Marvin D. Brailsford, Susan Crown and Harold B. Smith to vote on the items discussed in these proxy materials and on any other matter that is properly raised at the Annual Meeting. If you do not indicate how you want to vote, your proxy will be voted FOR the election of each director nominee, FOR the approval of the amendment of our Restated Certificate of Incorporation, FOR the approval of the 2006 Stock Incentive Plan, FOR the ratification of the appointment of Deloitte & Touche LLP as ITW’s independent public accountants, AGAINST each of the stockholder proposals and FOR or AGAINST any other properly raised matter at the discretion of Ms. Crown and Messrs. Brailsford and Smith. May I revoke my proxy? You may revoke your proxy at any time before it is voted at the Annual Meeting in one of four ways: 1. Notify ITW’s Secretary in writing before the Annual Meeting that you wish to revoke your proxy; 2. Submit another proxy with a later date; 3. Vote by telephone or internet after you have given your proxy; or 4. Vote in person at the Annual Meeting. What does it mean if I receive more than one proxy card? Your shares are likely registered differently or are in more than one account. You should sign and return all proxy cards to guarantee that all of your shares are voted. What constitutes a quorum? The presence, in person or by proxy, of the holders of a majority of ITW shares entitled to vote at the Annual Meeting constitutes a quorum. Your shares will be considered part of the quorum if you return a signed and dated proxy card or if you vote by telephone or internet. Abstentions and broker non−votes are counted as “shares present” at the meeting for purposes of determining if a quorum exists. A broker non−vote occurs when a broker submits a proxy that does not indicate a vote as to a proposal because he or she does not have voting authority and has not received voting instructions from you. What vote is required to approve each proposal? Election of Directors: The ten nominees who receive the highest number of votes will be elected. However, any nominee who fails to receive the affirmative vote of a majority of the votes cast will tender his or her resignation in accordance with our Corporate Governance Guidelines discussed more fully on page 10. If you do not want to vote your shares for a particular nominee, you may indicate that in the space provided on the proxy card or withhold authority as prompted during telephone or internet voting. Broker non−votes and votes to withhold authority for one or more nominees are not considered shares voted and will not affect the outcome of the vote. 2
  • 8. Table of Contents Approval of the Amendment of our Restated Certificate of Incorporation: Approval of this proposal would require the affirmative vote of a majority of the holders of our outstanding common stock. An abstention will have the effect of a vote against the proposal, but a broker non−vote will have no effect. Approval of the Illinois Tool Works Inc. 2006 Stock Incentive Plan: Approval of this proposal would require the affirmative vote of a majority of the shares present or represented by proxy at the Annual Meeting and entitled to vote. An abstention will have the effect of a vote against the proposal, but a broker non−vote will have no effect. Ratification of the Appointment of Independent Public Accountants: Although we are not required to submit the appointment of our independent public accountants to a vote of stockholders, we believe that it is appropriate to ask that you ratify the appointment. Ratification of the appointment of Deloitte & Touche LLP as ITW’s independent public accountants requires the affirmative vote of a majority of the shares present or represented by proxy at the Annual Meeting and entitled to vote. An abstention will have the effect of a vote against the ratification, but a broker non−vote will have no effect. Stockholder Proposals: Approval of each stockholder proposal presented at the Annual Meeting would require the affirmative vote of a majority of the shares present or represented by proxy at the Annual Meeting and entitled to vote. An abstention will have the effect of a vote against the proposal, but a broker non−vote will have no effect. How do I submit a stockholder proposal? To be considered for inclusion in our proxy statement for the May 2007 Annual Meeting, a stockholder proposal must be received no later than November 28, 2006. Your proposal must be in writing and must comply with the proxy rules of the Securities and Exchange Commission (“SEC”). You may also submit a proposal that you do not want included in the proxy statement, but that you want to raise at the May 2007 Annual Meeting. If you submit that proposal after February 3, 2007, then SEC rules permit the individuals named in the proxies solicited by ITW’s Board of Directors for that meeting to exercise discretionary voting power as to that proposal. You should send your proposal to our Secretary at our address on the cover of this proxy statement. How do I nominate a director? If you wish to nominate an individual for election as a director at the May 2007 Annual Meeting, our Secretary must receive your written nomination by December 29, 2006. Our by−laws require that your nomination include: (1) your name and address; (2) the name, age and home and business addresses of the nominee; (3) the principal occupation or employment of the nominee; (4) the number of shares of ITW stock that the nominee beneficially owns; (5) a statement that the nominee is willing to be nominated and serve as a director; and (6) any other information regarding the nominee that would be required by the SEC to be included in a proxy statement had ITW’s Board of Directors nominated that individual. Any nomination that you make must be approved by the Corporate Governance and Nominating Committee as well as by the Board of Directors. 3
  • 9. Table of Contents Who pays to prepare, mail and solicit the proxies? ITW will pay all of the costs of preparing and mailing the proxy statement and soliciting these proxies. We will ask brokers, dealers, banks, voting trustees and other nominees and fiduciaries to forward the proxy materials and our Annual Report to the beneficial owners of ITW common stock. Upon request, we will reimburse them for their reasonable expenses. In addition to mailing proxy materials, our officers, directors and employees may solicit proxies in person, by telephone or otherwise. 4
  • 10. Table of Contents Election of Directors Stockholders are being asked to elect ten directors at the Annual Meeting. The individuals listed below have been nominated by the Board of Directors as recommended by the Corporate Governance and Nominating Committee. Each director will serve until the May 2007 Annual Meeting, until a qualified successor director has been elected, or until he or she resigns or is removed by the Board of Directors. We will vote your shares as you specify on the enclosed proxy card, by telephone or by internet. If you do not specify how you want your shares voted, we will vote them FOR the election of all the nominees listed below. If unforeseen circumstances (such as death or disability) make it necessary for the Board of Directors to substitute another person for any of the nominees, we will vote your shares FOR that other person. The Board of Directors does not anticipate that any nominee will be unable to serve. The nominees have provided the following information about themselves: William F. Aldinger, 58, retired as the Chairman and Chief Executive Officer of HSBC Finance Corporation (formerly Household International, Inc.), a consumer finance company, in April 2005, a position he held since 1996. He also retired as Chairman and Chief Executive Officer of its parent company, HSBC North America Holdings Inc., a position he held since 2004. He serves on the boards of AT&T Inc, KKR Financial Corp. and The Charles Schwab Corporation. Mr. Aldinger has served as a director of ITW since 1998. Michael J. Birck, 68, has served as the Chairman of Tellabs, Inc. since 2000 and Chief Executive Officer from 2002 to February 2004. Mr. Birck founded Tellabs and served as President and Chief Executive Officer from 1975 to 2000. Tellabs designs, manufactures, markets and services voice and data equipment. He is a director of Molex, Inc. and Tellabs, Inc. Mr. Birck has served as a director of ITW since 1996. Marvin D. Brailsford, 67, is a retired Vice President of Kaiser−Hill Company LLC, a construction and environmental services company. Prior to his employment with Kaiser−Hill, he served with the United States Army for 33 years, retiring with the rank of Lieutenant General. He is a Director of Conn’s, Inc. Mr. Brailsford has served as a director of ITW since 1996. 5
  • 11. Table of Contents Susan Crown, 47, has been Vice President of Henry Crown and Company, a business with diversified investments, since 1984. She is a director of Northern Trust Corporation and its subsidiary, The Northern Trust Company. Ms. Crown has served as a director of ITW since 1994. Don H. Davis, Jr., 66, retired as Chairman of the Board of Rockwell Automation, Inc., a leading global provider of industrial automation power, control and information products and services, in February 2005, a position he had held since 1998. From 1997 to 2004 he served as Rockwell’s Chief Executive Officer. He is a director of Rockwell Automation, Inc., Ciena Corporation and Journal Communications, Inc. Mr. Davis has served as a director of ITW since 2000. Robert C. McCormack, 66, is an Advisory Director of Trident Capital, Inc., a venture capital firm, and was a Partner of Trident from 1993 to the end of 2004. From 1987 to 1993, Mr. McCormack served successively as Deputy Under Secretary of Defense and Assistant Secretary of the Navy (Finance and Comptroller). He is a director of DeVry Inc., Mead Westvaco Corporation and Northern Trust Corporation and its subsidiary, The Northern Trust Company. Mr. McCormack has served as a director of ITW since 1993, and previously served as a director of ITW from 1978 through 1987. Robert S. Morrison, 63, is a retired Vice Chairman of PepsiCo, Inc., a beverage and food products company, serving from 2001 to 2003. From 1997 to 2001, prior to its merger with PepsiCo, he was Chairman, President and Chief Executive Officer of The Quaker Oats Company. He also served as interim Chairman and Chief Executive Officer of 3M Co. from June to December 2005. Mr. Morrison is a director of 3M, The Tribune Company and Aon Corporation. Mr. Morrison has been a director of ITW since 2003. 6
  • 12. Table of Contents James A. Skinner, 61, has served as Vice Chairman of McDonald’s Corporation, a restaurant chain, since 2003 and Chief Executive Officer since November 2004, previously serving as President and Chief Operating Officer of McDonald’s Restaurant Group from February 2002 to December 2002; President and Chief Operating Officer of McDonald’s Europe, Asia/ Pacific, Middle East and Africa from June 2001 to February 2002; and President of McDonald’s−Europe from December 1997 to June 2001. He is a director of Walgreen Co. and was elected as a director of ITW in August 2005. David B. Speer, 55, has served as Chief Executive Officer of ITW since August 2005 and President since August 2004, previously serving as Executive Vice President from 1995 to August 2004. Mr. Speer has 27 years of service with ITW. He is a director of Rockwell Automation, Inc. and was elected a director of ITW in August 2005. Harold B. Smith, 72, is a retired officer of ITW and is a director of W.W. Grainger Inc., Northern Trust Corporation and its subsidiary, The Northern Trust Company. Mr. Smith has served as a director of ITW since 1968. 7
  • 13. Table of Contents Board of Directors and Its Committees ITW’s Board of Directors met five times during 2005. In addition to meetings of the full Board, directors attended meetings of Board committees, independent directors met twice in regularly scheduled executive sessions, and non−management directors met once. The Chairmen of each of the Board of Directors’ standing committees rotate as the Chairman of executive sessions of the independent directors. The Board of Directors has standing audit, compensation, corporate governance and nominating, and finance committees. Under the terms of their charters, each member of the audit, compensation and corporate governance and nominating committees must meet applicable New York Stock Exchange (“NYSE”) and Securities and Exchange Commission (“SEC”) independence requirements. ITW encourages its directors to attend all Board and committee meetings and the Annual Meeting of Stockholders. In 2005, all of the directors attended at least 88% of the meetings of the Board and the committees on which they serve, and all of the directors attended the Annual Meeting of Stockholders. Audit Committee Meetings in 2005: 5 Members: Don H. Davis, Jr. (Chairman) William F. Aldinger Michael J. Birck Marvin D. Brailsford James A. Skinner Function: Responsible for the engagement of independent public accountants; assisting the Board with respect to matters involving and overseeing: accounting, financial reporting and internal audit functions; integrity of ITW’s financial statements; compliance with legal and regulatory requirements; independence and performance of ITW’s independent public accountants; and performance of ITW’s internal audit function. Additional information on the Committee and its activities is set forth in the “Report of the Audit Committee” on page 26. 8
  • 14. Table of Contents Compensation Committee Meetings in 2005: 3 Members: William F. Aldinger (Chairman) Michael J. Birck Susan Crown Robert C. McCormack Robert S. Morrison James A. Skinner Function: Establishes and oversees executive compensation policies; recommends to the other independent directors compensation for the Chief Executive Officer; approves compensation for executive officers; and makes recommendations on new incentive compensation and equity−based plans or amendments. Additional information on the Committee and its activities is set forth in the “Report of the Compensation Committee on Executive Compensation” on page 22. Corporate Governance and Nominating Committee Meetings in 2005: 3 Members: Marvin D. Brailsford (Chairman) Susan Crown Don H. Davis, Jr. Robert S. Morrison James A. Skinner Function: Identifies, evaluates and recommends director candidates; develops, administers and recommends corporate governance guidelines; oversees the evaluation of the Board and management; and makes recommendations as to Board committees and Board size. Finance Committee Meetings in 2005: 1 Members: Robert C. McCormack (Chairman) William F. Aldinger Don H. Davis, Jr. Robert S. Morrison Harold B. Smith Function: Reviews, evaluates and recommends to the Board, management’s proposals relating to ITW’s financing, investment portfolio and real estate investments. 9
  • 15. Table of Contents Corporate Governance Policies and Practices General We have long believed that good corporate governance is important to assure that ITW is managed for the long−term benefit of its stockholders. In that regard, we continuously review our corporate governance policies and practices not only for compliance with the provisions of the Sarbanes−Oxley Act of 2002, the rules and regulations of the SEC, and the listing standards of the NYSE but for good corporate governance as well. In February 2006, we amended our Corporate Governance Guidelines to include a director election provision that requires any nominee for director who fails to receive the affirmative vote of a majority of the votes cast to tender his or her resignation. The Corporate Governance and Nominating Committee of the Board will consider the resignation and recommend to the Board whether to accept or reject it. In considering the resignation, the Committee will take into account such factors as the stated reasons why stockholders withheld votes for the election of the director, the length of service and qualifications of the director, the director’s contributions to ITW and our Corporate Governance Guidelines. The Board will consider the Committee’s recommendation, but no director who failed to receive a majority vote will participate. We will disclose the results in a Form 8−K within 90 days of the Annual Meeting. Our Board of Directors has adopted and annually reviews charters for our Audit, Compensation, and Corporate Governance and Nominating Committees. We maintain a corporate governance section on our website that includes the charters of these committees, ITW’s Corporate Governance Guidelines, ITW’s Statement of Principles of Conduct (our code of business conduct and ethics for directors, officers and employees) and ITW’s Code of Ethics for the Chief Executive Officer and key financial and accounting personnel. In addition, we will promptly post any amendments to or waivers of the Code of Ethics on our website. You can find this and other corporate governance information at www.itw.com. We will also provide copies of this information upon request. Stockholder Communications with Directors You may communicate with any of our directors or with the independent directors as a group by sending an e−mail to independentdirectors@itw.com or by writing to the Independent Directors c/o the Corporate Secretary at our address on the cover of this proxy statement. Board Independence Our Board conducts an annual review as to whether each of our directors meets the applicable independence standards of the NYSE. In accordance with the NYSE listing standards, our Board of Directors has adopted categorical standards for director independence. A copy of ITW’s Categorical Standards for Director Independence is attached as Appendix A. A director will not be considered independent unless the Board of Directors determines that the director has no material relationship with ITW (directly or as a partner, stockholder or officer of an organization that has a relationship with ITW). 10
  • 16. Table of Contents The Board has determined that each of the current directors standing for re−election, except David B. Speer, has no material relationship with ITW other than as a director and is independent within the meaning of ITW’s Categorical Standards for Director Independence and the listing standards of the NYSE. In making its independence determinations, the Board of Directors has broadly considered all relevant facts and circumstances. Director Candidates Our by−laws permit stockholders to nominate directors for consideration at an annual stockholder meeting. The policy of the Corporate Governance and Nominating Committee is to consider a properly submitted stockholder nomination for election as director. For a description of the process for submitting a director candidate in accordance with ITW’s by−laws, see “Questions and Answers — How do I nominate a director?” on page 3. Our directors play a critical role in guiding ITW’s strategic direction and oversee the management of ITW. Board candidates are considered based upon various criteria, such as their broad−based business and professional skills and experiences, a global business and social perspective, concern for the long−term interests of the stockholders, and personal integrity and judgment. In addition, directors must have time available to devote to Board activities and to enhance their knowledge of the global manufacturing environment. Accordingly, we seek to attract and retain highly qualified directors who have sufficient time to attend to their duties and responsibilities to ITW. The Corporate Governance and Nominating Committee or other members of the Board of Directors may identify a need to add new members to the Board of Directors with specific criteria or simply to fill a vacancy on the Board. At that time the Corporate Governance and Nominating Committee would initiate a search, seeking input from Board members and senior management and, to the extent it deems appropriate, engaging a search firm. An initial qualified candidate or a slate of qualified candidates would be identified and presented to the Committee for its evaluation and approval. The Committee would then seek full Board endorsement of the selected candidate(s). Assuming that a properly submitted stockholder recommendation for a director candidate has been received, the Corporate Governance and Nominating Committee will evaluate that candidate by following substantially the same process, and applying substantially the same criteria, as for candidates submitted by other sources, but the Committee has no obligation to recommend the candidate for nomination. Director Compensation Annual Retainer and Attendance Fees The annual retainer for non−employee directors is $40,000, the fee for each Board or committee meeting attended is $2,000, and the annual fee for committee chairs is an additional $3,000, except for the Audit Committee chair, whose annual fee is $10,000. Non−employee directors can defer receipt of all or a portion of their annual retainer, chair and 11
  • 17. Table of Contents meeting fees until retirement or resignation. Deferred fee amounts are credited with interest at current rates. Non−Officer Directors’ Fee Conversion Plan In order to link director compensation with stockholder interests, non−officer directors are given the opportunity to elect annually to receive all or a portion of their annual retainer, chairman and meeting fees in an equivalent value of ITW common stock pursuant to the Non−Officer Directors’ Fee Conversion Plan. The number of ITW shares to be issued to a director is determined by dividing the dollar amount of the fee subject to the election by the fair market value of ITW common stock on the date the fee otherwise would have been paid in cash. A director can also elect to defer receipt of the shares, in which case the deferred shares are credited as stock units to an account in the director’s name. The account receives additional credit for cash dividends and is adjusted for stock dividends, splits, combinations or other changes in ITW common stock. The stock units in a director’s account are distributed as shares of ITW common stock upon retirement, resignation or a corporate change (as defined in the 1996 Stock Incentive Plan), with any fractional shares paid in cash. If the stockholders approve the 2006 Stock Incentive Plan, the non−deferral provisions of the Non−Officer Directors’ Fee Conversion Plan will be merged into the 2006 Stock Incentive Plan, which will continue to offer the fee conversion opportunities described above. Restricted ITW Common Stock In 1995, the stockholders approved a plan whereby a portion of each non−employee director’s compensation includes the periodic grant of restricted ITW common stock, thereby directly linking another element of director compensation with stockholder interests. ITW last granted restricted shares under the plan in February 2004. At that time, each non−employee director of ITW received an award of 900 restricted shares, which vested as to 450 shares on January 3, 2005 and January 3, 2006. As of January 4, 2006 there are no restricted shares granted under the plan that have not vested. ITW intends to grant restricted shares to each non−employee director under the 2006 Stock Incentive Plan, if the plan is approved by the stockholders. Phantom ITW Stock To tie a further portion of their compensation to stockholder interests, non−employee directors of ITW are awarded 1,000 units of phantom stock upon first becoming a director. The value of each unit equals the market value of one share of ITW common stock. Additional units are credited to a director’s phantom stock account in an amount equivalent to cash dividends paid on ITW stock. Accounts are adjusted for stock dividends, stock splits, combinations or similar changes. A director is eligible for a cash distribution from his or her account at retirement or upon approved resignation. When phantom stock is awarded, directors elect to receive the distribution in either a lump sum or in up to ten annual installments. Directors receive the value of their phantom stock accounts immediately upon a change of control. 12
  • 18. Table of Contents Ownership of ITW Stock Directors and Executive Officers The following table shows how much ITW common stock the directors, the named executive officers, and all directors and executive officers as a group beneficially owned as of December 31, 2005. The “named executive officers” are the Chief Executive Officer, the former Chief Executive Officer, the next four most highly compensated executive officers, based on salary and bonus, who were serving at the end of the last fiscal year and an additional person who would have qualified as one of our most highly compensated executive officers had he been serving as an executive officer at the end of the last fiscal year. Beneficial ownership is a technical term broadly defined by the SEC to mean more than ownership in the usual sense. In general, beneficial ownership includes any shares a director or executive officer can vote or transfer and stock options that are exercisable currently or that become exercisable within 60 days. Except as otherwise noted, the stockholders named in this table have sole voting and investment power for all shares shown as beneficially owned by them. The number of shares beneficially owned by each non−employee director includes 900 shares (no shares in the case of Mr. Skinner) of ITW common stock that were granted under the Directors’ Restricted Stock Plan, which fully vested in January 2006. The number of the directors’ phantom stock units disclosed in the table represents an equivalent number of shares of ITW common stock as of December 31, 2005. Phantom stock units are not transferable and have no voting rights. The units are not included in the “percent of class” calculation. 13
  • 19. Table of Contents Shares of Common Phantom Percent Stock of Name of Beneficial Owner Beneficially Owned Stock Units Class Directors (other than Executive Officers) William F. Aldinger 7,158(1) 1,092 * Michael J. Birck 14,893(2) 2,229 * Marvin D. Brailsford 6,011(3) 2,223 * Susan Crown 12,500(4) 2,247 * Don H. Davis, Jr. 7,844(5) 1,076 * Robert C. McCormack 11,903,459(6) 2,247 4.2% Robert S. Morrison 4,849(7) 1,032 * James A. Skinner 1,000(8) 1,004 * Harold B. Smith 33,069,422(9) — 11.7% Executive Officers W. James Farrell 1,629,572(10) — * David B. Speer 293,780(11) — * Frank S. Ptak 872,637(12) — * Russell M. Flaum 284,961(13) — * Thomas J. Hansen 183,911(14) — * Hugh J. Zentmyer 148,227(15) — * David T. Flood 104,478(16) — * Directors and Executive Officers as a Group (24 Persons) 36,389,708(17) 13,150 12.9% * Less than 1% (1) Includes (a) 100 shares owned by Mr. Aldinger’s spouse, as to which he disclaims beneficial ownership; and (b) 450 unvested restricted shares to which Mr. Aldinger has no investment power. (2) Includes 450 unvested restricted shares as to which Mr. Birck has no investment power. (3) Includes 450 unvested restricted shares as to which Mr. Brailsford has no investment power. (4) Includes (a) 2,000 shares owned by Ms. Crown’s spouse as to which she disclaims beneficial ownership; (b) 2,000 shares held in trusts of which Ms. Crown’s children are beneficiaries and as to which she disclaims beneficial ownership; and (c) 450 unvested restricted shares as to which Ms. Crown has no investment power. (5) Includes 450 unvested restricted shares as to which Mr. Davis has no investment power. (6) Includes (a) 400 shares owned in a trust as to which Mr. McCormack shares voting and investment power with The Northern Trust Company; (b) 11,894,134 shares owned in twelve trusts as to which Messrs. McCormack and H. B. Smith and The Northern Trust Company are trustees and share voting and investment power; (c) 6,275 shares owned in a limited partnership in which Mr. McCormack owns 99% of the limited partnership units; and (d) 450 unvested restricted shares as to which Mr. McCormack has no investment power. (7) Includes 450 unvested restricted shares as to which Mr. Morrison has no investment power. (8) These shares were purchased by Mr. Skinner in February 2006. (9) Includes (a) 18,879,800 shares owned in twelve trusts as to which Mr. Smith shares voting and investment power with The Northern Trust Company and others; (b) 1,790,476 shares owned in ten trusts as to which he shares voting and investment power; (c) 11,894,134 shares owned in twelve trusts as to which Messrs. McCormack and H. B. Smith and The Northern Trust Company are trustees and share voting and investment power; (d) 463,795 shares owned in a revocable trust as to which Mr. Smith has sole voting and investment power; (e) 40,767 shares owned by a charitable foundation of which Mr. Smith is a director; and (f) 450 unvested restricted shares to which Mr. Smith has no investment power. 14
  • 20. Table of Contents Mr. Smith’s address is c/o Corporate Secretary, Illinois Tool Works Inc., 3600 West Lake Avenue, Glenview, Illinois 60026. (10) Includes (a) 130,302 shares owned in a partnership as to which Mr. Farrell shares voting and investment power; (b) 67,848 shares owned in a revocable trust as to which Mr. Farrell has sole voting and investment power; (c) 20,488 shares owned by a charitable foundation of which Mr. Farrell is an officer; (d) 30,800 unvested restricted shares as to which Mr. Farrell has no investment power; (e) 7,141 shares allocated to Mr. Farrell’s account in the ITW Savings and Investment Plan; and (f) 1,335,069 shares covered by options exercisable within 60 days. (11) Includes (a) 4,400 unvested restricted shares as to which Mr. Speer has no investment power; (b) 882 shares allocated to Mr. Speer’s account in the ITW Savings and Investment Plan; and (c) 262,500 shares covered by options exercisable within 60 days. (12) Includes 840,000 shares covered by options exercisable by Mr. Ptak within 60 days. (13) Includes (a) 4,400 unvested restricted shares as to which Mr. Flaum has no investment power; (b) 1,840 shares allocated to Mr. Flaum’s account in the ITW Savings and Investment Plan; and (c) 235,000 shares covered by options exercisable within 60 days. (14) Includes (a) 4,400 unvested restricted shares as to which Mr. Hansen has no investment power; and (b) 171,750 shares covered by options exercisable within 60 days. (15) Includes (a) 3,685 unvested restricted shares as to which Mr. Zentmyer has no investment power; (b) 2,000 shares owned in a revocable trust as to which Mr. Zentmyer has sole voting and investment power; (c) 11,014 shares owned by Mr. Zentmyer’s spouse in a trust, as to which he disclaims beneficial ownership; (d) 325 shares held in a trust of which Mr. Zentmyer’s brother is the beneficiary and as to which he disclaims beneficial ownership (e) 7,906 shares allocated to Mr. Zentmyer’s account in the ITW Savings and Investment Plan; and (f) 120,000 shares covered by options exercisable within 60 days. (16) Includes (a) 2,970 unvested restricted shares as to which Mr. Flood has no investment power and (b) 85,000 shares covered by options exercisable within 60 days. (17) Includes 2,735,331 shares covered by options exercisable within 60 days. Other Principal Stockholders This table shows, as of December 31, 2005, the only stockholders other than a director that we know to be a beneficial owner of more than 5% of ITW common stock. We maintain a commercial banking relationship with The Northern Trust Company and its wholly owned subsidiaries. The Northern Trust Company is a wholly owned subsidiary of Northern Trust Corporation. Susan Crown, Robert C. McCormack and Harold B. Smith, directors of ITW, are also directors of Northern Trust Corporation and The Northern Trust Company. The commercial banking relationship between ITW and The Northern Trust Company may involve, but is not strictly limited to, the following services: creating and maintaining deposit accounts, credit services, investment banking services, payment and collection services, trade services, credit enhancement or payment guaranty, acting as agent or fiduciary, consulting services, risk management services, and broker dealer services. In addition, The Northern Trust Company serves as the trustee under ITW’s principal pension plans. The banking and trustee relationships with The Northern Trust Company are conducted in the ordinary course 15
  • 21. Table of Contents of business on an arms−length basis. Banking and trustee fees paid to The Northern Trust Company by ITW were approximately $1.57 million in 2005. Name and Address of Shares of Common Stock Percent Beneficial Owner Beneficially Owned of Class The Northern Trust Company 40,803,012(1) 14.4% 50 South LaSalle Street Chicago, IL 60675 Capital Research and Management Company 17,438,900(2) 6.2% 333 South Hope Street Los Angeles, CA 90071 (1) The Northern Trust Company and its affiliates act as sole fiduciary or co−fiduciary of trusts and other fiduciary accounts that own an aggregate of 40,803,012 shares. They have sole voting power with respect to 8,086,747 shares and share voting power with respect to 31,981,074 shares. They have sole investment power with respect to 4,168,984 shares and share investment power with respect to 31,790,246 shares. In addition, The Northern Trust Company holds in other accounts, but does not beneficially own, 19,691,362 shares, resulting in aggregate holdings by The Northern Trust Company of 60,494,374 shares, or 21.37%. (2) Capital Research and Management Company, an investment advisor registered under Section 203 of the Investment Advisers Act of 1940, is deemed to be the beneficial owner of these shares as a result of acting as investment adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940. It has sole voting power with respect to 1,780,900 shares and shares voting power with respect to none of the shares. It has sole dispositive power with respect to all 17,438,900 shares. This information was provided in a Schedule 13G filed with the SEC on February 10, 2006. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires that ITW’s executive officers, directors and greater than 10% stockholders file reports of ownership and changes of ownership of ITW common stock with the SEC and the NYSE. Based on a review of copies of these reports provided to us during fiscal 2005 and written representations from executive officers and directors, we believe that all filing requirements were met during 2005, except that in August 2005, Jon C. Kinney, former Chief Financial Officer of ITW, was inadvertently late in filing one Form 4 reporting shares withheld to cover taxes on the accelerated vesting of his restricted shares upon retirement. 16
  • 22. Table of Contents Executive Compensation This table summarizes the compensation for the named executive officers. Summary Compensation Table Long−Term Compensation Awards Annual Compensation Restricted Securities All Other Name and Stock Underlying Compensation Principal Position Year Salary(1) Bonus(1)(2) Awards(3) Options(4) (6) W. James Farrell(7) 2005 $ 1,189,800 $ 2,296,314 $ — — $ 121,723 Chairman and former Chief 2004 1,186,308 2,288,000 7,776,038 423,069(5) 115,441 Executive Officer 2003 1,098,085 2,112,000 9,287,600 — 103,848 David B. Speer(7) 2005 $ 605,769 $ 1,387,500 $ — — $ 55,152 President and Chief 2004 418,692 970,000 1,110,838 150,000 37,216 Executive Officer 2003 333,496 644,620 1,326,800 — 31,895 Frank S. Ptak(7) 2005 $ 546,960 $ 1,063,816 $ — — $ 111,098 Former Vice Chairman 2004 549,615 1,060,000 3,887,977 200,000 53,508 2003 509,221 979,200 4,643,800 — 48,350 Russell M. Flaum 2005 $ 346,338 $ 658,476 $ — — $ 35,572 Executive Vice President 2004 345,462 670,000 1,110,838 40,000 29,920 2003 320,015 509,392 1,326,800 — 28,235 Thomas J. Hansen 2005 $ 326,600 $ 594,412 $ — — $ 31,543 Executive Vice President 2004 325,646 574,620 1,110,838 75,000 29,261 2003 301,144 510,380 1,326,800 — 27,886 Hugh J. Zentmyer 2005 $ 319,692 $ 600,325 $ — — $ 31,391 Executive Vice President 2004 318,874 577,200 930,295 40,000 27,955 2003 295,011 479,830 1,111,195 — 26,272 David T. Flood 2005 $ 290,338 $ 550,368 $ — — $ 29,370 Executive Vice President 2004 288,231 548,800 749,835 40,000 26,342 2003 255,808 464,400 895,590 — 24,680 (1) Actual salary or bonus earned. Includes amounts deferred by the executive under the Executive Contributory Retirement Income Plan or the Savings and Investment Plan. (2) Amounts awarded under the Executive Incentive Plan are based on the executive’s base salary as of December 31 for that year and paid in the following year. (3) The restricted stock awards granted to the named executive officers under our 1996 Stock Incentive Plan on January 2, 2003 are fully vested, and those granted on January 2, 2004 to the named executive officers vest in three equal installments on December 16 in the years 2004 and 2005 and on December 18, 2006. An employee’s shares will vest only if he or she is actively employed with ITW on the vesting date, and, unless otherwise determined by the Compensation Committee, unvested shares will be forfeited upon retirement, death or disability. Each employee may exercise full voting rights and is entitled to receive all dividends and other distributions paid on the restricted stock from the date of the grant until the stock is forfeited or sold. The December 31, 2005 value of the unvested portion of the restricted stock awards for the named executive officers was: Mr. Farrell, $2,710,092; Mr. Speer, $387,156; Mr. Ptak, $0; Mr. Flaum, $387,156; Mr. Hansen, $387,156; Mr. Zentmyer, $324,243; and Mr. Flood, $261,330. The Compensation Committee determined that it would be appropriate to accelerate the vesting of 15,400 shares of restricted stock held by Mr. Ptak as of his retirement on December 28, 2005. Based on the closing price of ITW stock on that date, the shares had a value of $1,377,838. The restricted stock grants in January 2003 and 17
  • 23. Table of Contents 2004 were in lieu of stock options that would have traditionally been granted in December 2002 and 2003, respectively. (4) On December 7, 2005, the Compensation Committee approved stock option awards with a grant date of February 1, 2006. Since this grant is not effective until February 1, 2006 it is not represented in the Summary Compensation Table but will be reflected in next year’s table. (5) Includes options granted as “restorative options”. A restorative option right applies to the options granted under the 1996 Stock Incentive Plan so long as the option holder is employed by ITW. This means that an option holder who delivers previously acquired shares of ITW common stock in payment of an option’s exercise price will be granted an additional option, sometimes referred to as a “restorative option”, which is subject to certain restrictions, to purchase a number of shares equal to the number of delivered shares. (6) For 2005, represents company matching contributions to the Executive Contributory Retirement Income Plan or the Savings and Investment Plan and, for Mr. Ptak, $53,000 for vacation that was accrued but unused at the time of his retirement on December 28, 2005. (7) Mr. Farrell relinquished his title as Chief Executive Officer, effective August 5, 2005, at which time Mr. Speer was elected Chief Executive Officer. In addition, Mr. Ptak retired as Vice Chairman, effective December 28, 2005. In the event of a corporate change (as defined in the 1996 Stock Incentive Plan), each executive officer’s unvested restricted stock and stock options previously granted under the 1996 Stock Incentive Plan fully vest. In addition, executives receive a cash payment under the Executive Incentive Plan immediately upon a corporate change. The amount paid under the Executive Incentive Plan equals a portion of the maximum awards payable under the Plan for that year based on the number of days in the year that have elapsed as of the date of the corporate change. Executives may also request a distribution of 90% of their Executive Contributory Retirement Income Plan account within 18 months of a corporate change, forfeiting the remaining 10% of the account. Option Exercises in 2005 and Year−End 2005 Option Values This table provides information regarding the exercise of options during 2005 and options outstanding at the end of the year for the named executive officers. The “value realized” is calculated using the difference between the option exercise price and the price of ITW common stock on the date of exercise multiplied by the number of shares acquired upon exercise. The “value of unexercised in−the−money options at fiscal year−end 2005” is calculated using the difference between the option exercise price and $87.99 (the closing price of ITW stock on December 30, 2005, the last trading day of the year) multiplied by the number of shares underlying the option. An option is in−the−money if the market value of ITW common stock is greater than the option’s exercise price. 18
  • 24. Table of Contents Number of Securities Underlying Unexercised Value of Unexercised Options at Fiscal In−the−Money Options at Shares Year−End 2005 Fiscal Year−End 2005 Acquired Value on Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable W. James Farrell — — 1,335,069 300,000 $ 34,336,380 — David B. Speer — — 262,500 112,500 6,521,025 — Frank S. Ptak 60,000 $ 3,590,403 840,000 — 18,236,350 — Russell M. Flaum — — 235,000 30,000 6,521,025 — Thomas J. Hansen — — 171,750 56,250 4,171,095 — Hugh J. Zentmyer 24,000 1,365,017 120,000 30,000 3,213,900 — David T. Flood 14,000 402,520 85,000 30,000 2,076,625 — Retirement Plans Retirement Accumulation Plan The ITW Retirement Accumulation Plan is our principal defined benefit plan. It covers approximately 22,000 domestic business unit employees, including executive officers. Upon retirement, participants receive benefits based on years of plan participation and average compensation for the five highest years out of the last ten years of employment. For the named executive officers, compensation includes salary and bonus shown in the Summary Compensation Table. As of January 1, 2001, the plan was amended to provide a defined lump−sum amount at retirement that is convertible to an annuity. Persons who were age 50 or older before January 1, 2001, and had at least five years of plan participation, will receive a benefit that is no less valuable than that provided under the prior plan formula, including early retirement subsidy. Because the Internal Revenue Code imposes limits on those plan benefits, the Board has established a supplemental plan that provides for payments to certain executives equal to benefits that would be paid but for these limitations. The tables below show the estimated annual benefits to be paid under the pension plan and supplemental plan to an individual who (1) was age 59 on December 31, 2005 (the average age of all of the executive officers who had reached age 50 on or before December 31, 2000) (Table I) and (2) reached age 48 on December 31, 2005 (the average age of all the executive officers who were younger than age 50 on December 31, 2000) (Table II) and, in both cases, who continues to participate in the plans through the plans’ normal retirement age of 65, assuming the plan provisions in effect on December 31, 2005 continue until that date. For years of participation prior to 2001, benefits have been computed based on the pension plan formula then in effect and the transition provisions in the amended plan. 19
  • 25. Table of Contents Table I Estimated Annual Normal Retirement Benefits (Current Dollars)(1) Years of Service as of December 31, 2011(2) Compensation 15 20 25 30 35 40 45 $ 600,000 $ 135,235 $ 184,800 $ 220,910 $ 265,092 $ 285,927 $ 306,761 $ 327,596 850,000 193,379 264,168 316,402 379,682 409,198 438,713 468,229 1,100,000 251,523 343,536 411,893 494,272 532,469 570,665 608,862 1,350,000 309,667 422,904 507,385 608,862 655,740 702,617 749,495 1,600,000 367,812 502,272 602,877 723,452 779,011 834,569 890,128 2,000,000 460,842 629,261 755,663 906,796 976,244 1,045,693 1,115,141 2,500,000 577,131 787,996 946,646 1,135,976 1,222,786 1,309,597 1,396,407 3,000,000 693,419 946,732 1,137,629 1,365,155 1,469,328 1,573,501 1,677,673 3,500,000 809,708 1,105,468 1,328,613 1,594,335 1,715,870 1,837,405 1,958,939 4,000,000 925,996 1,264,204 1,519,596 1,823,515 1,962,412 2,101,309 2,240,206 Table II Estimated Annual Normal Retirement Benefits (Current Dollars)(1) Years of Service as of December 31, 2022(2) Compensation 17 20 25 30 35 40 45 $ 600,000 $ 165,191 $ 185,053 $ 204,131 $ 250,755 $ 265,476 $ 280,196 $ 294,917 850,000 236,090 264,592 292,024 358,481 379,740 400,999 422,258 1,100,000 306,988 344,131 379,917 466,206 494,004 521,802 549,600 1,350,000 377,886 423,670 467,811 573,932 608,268 642,605 676,941 1,600,000 448,784 503,209 555,704 681,657 722,532 763,407 804,282 2,000,000 562,222 630,471 696,333 854,018 905,355 956,692 1,008,029 2,500,000 704,018 789,549 872,120 1,069,468 1,133,883 1,198,297 1,262,711 3,000,000 845,815 948,627 1,047,906 1,284,919 1,362,411 1,439,902 1,517,394 3,500,000 987,611 1,107,705 1,223,693 1,500,370 1,590,939 1,681,508 1,772,077 4,000,000 1,129,408 1,266,783 1,399,480 1,715,821 1,819,467 1,923,113 2,026,760 (1) Calculations of benefits in terms of 2005 dollars are based on 4% annual pay increases before and after 2001, 4% annual increases in Social Security Covered Compensation from 2005, and a 30−year Treasury Rate (used to convert defined lump sum benefits into an annuity) of 4.68% (published rate for October 2005). (2) Actual years of participation as of December 31, 2005 for the named executive officers were as follows: Mr. Farrell, 40.5 years; Mr. Ptak, 30.1 years; Mr. Flaum, 19.0 years; Mr. Hansen, 25.3 years; and Mr. Zentmyer, 19.0 years (for whom Table I is applicable); Mr. Speer, 27.5 years; and Mr. Flood, 26.1 years (for whom Table II is applicable). Executive Contributory Retirement Income Plans Certain of our executives participate in the ITW 1993 Executive Contributory Retirement Income Plan (the “1993 ECRIP”), which is a supplemental retirement plan pursuant to which these executives annually may elect to defer a portion of their salary and bonus, a percentage of which may be matched by ITW per the provisions of the ITW Savings and Investment Plan. Amounts deferred and matching contributions under the 1993 ECRIP for the named executive officers are included in the salary and bonus columns of the Summary Compensation Table on page 17, as appropriate. Account balances are paid out upon the occurrence of certain events, such as retirement, death or disability. In addition, certain of our executives participated in the ITW 1985 Executive Contributory Retirement 20
  • 26. Table of Contents Income Plan (the “1985 ECRIP”), the predecessor plan to the 1993 ECRIP, which functioned similarly to the 1993 ECRIP. We pay interest on the account balances at rates specified in the 1993 ECRIP and 1985 ECRIP. Interest credited to the 1993 ECRIP and 1985 ECRIP accounts for the named executive officers during 2003, 2004 and 2005, as well as accumulated amounts of interest since the inception of the 1993 ECRIP and 1985 ECRIP, are as follows: Accumulated Name 2003 2004 2005 Interest W. James Farrell $ 277,147 $ 346,094 $ 401,659 $ 1,837,288 David B. Speer 121,055 148,654 179,995 886,938 Frank S. Ptak 193,870 223,461 244,611 1,444,415 Russell M. Flaum 77,581 89,916 98,399 549,353 Thomas J. Hansen 120,142 140,442 155,369 866,443 Hugh J. Zentmyer 90,793 100,017 105,753 634,509 David T. Flood 73,654 89,485 102,652 507,652 In addition, Mr. Farrell participated in the ITW 1982 Executive Contributory Retirement Income Plan (the “1982 ECRIP”), which, unlike the 1993 ECRIP and 1985 ECRIP, was a defined benefit plan pursuant to which certain executives made contributions over a five−year period and receive fixed annual payments upon retirement, death or disability. Under the 1982 ECRIP, Mr. Farrell is eligible to receive an annual benefit of $113,529 for 15 years beginning at the normal retirement age of 65. No interest is paid under this plan. Equity Compensation Plan Information The following table provides information as of December 31, 2005 about ITW’s existing equity compensation plans. (c) Number of securities (a) (b) remaining available for Number of securities Weighted−average future issuance under to be issued upon exercise price of equity compensation exercise of outstanding outstanding plans (excluding options, options, warrants and securities reflected in warrants Plan Category rights and rights column (a)) Equity compensation plans approved by security holders 10,285,382 $ 67.53 7,177,294(2) Equity compensation plans not approved by security holders 16,308(1) — 22,236(3) Total 10,301,690 $ 67.53 7,199,530 (1) Represents shares credited to directors’ accounts for annual retainer and meeting fees deferred pursuant to the Non−Officer Directors’ Fee Conversion Plan. A description of the Plan can be found on page 12. (2) These shares remain available for issuance under the 1996 Stock Incentive Plan. This amount excludes 147,812 shares of unvested restricted stock granted pursuant to the 1996 Stock Incentive Plan and 3,600 shares of unvested restricted stock granted pursuant to the Directors’ Restricted Stock Plan. If these shares do not vest, they will no longer constitute shares outstanding and will be available for future issuance under the terms of the respective plans. (3) These shares remain available for issuance under the Non−Officer Directors’ Fee Conversion Plan. 21
  • 27. Table of Contents Report of the Compensation Committee on Executive Compensation The Compensation Committee of the Board of Directors is composed of six directors who meet the independence requirements of the New York Stock Exchange. The Committee administers ITW’s compensation plans for key employees, including the Executive Incentive Plan and the 1996 Stock Incentive Plan. The Committee also approves compensation levels for executive officers and recommends the Chief Executive Officer’s compensation for approval by the independent Board members. In making its executive compensation decisions and recommendations, the Committee considers management’s contribution to ITW’s long−term growth. One long−term performance factor that the Committee considers is ITW’s total stockholder return, which is measured by capital appreciation and reinvested dividends. For the five− and ten−year periods ending December 31, 2005, the compound annual stockholder rate of return was 9.6% and 12.9%, respectively. For the same periods, the rate of return on the Standard & Poor’s 500 Index was 0.5% and 9.1%, respectively, and the rate of return on the Standard & Poor’s Industrial Machinery Index was 11.0% and 11.5%, respectively. Compensation for executive officers is composed of base salary, a cash bonus based on performance, and stock incentives. In addition, executive officers participate in ITW retirement plans, including the Retirement Accumulation Plan and the Executive Contributory Retirement Income Plans, which are discussed in the Executive Compensation section of this proxy statement. The Committee believes that the stock incentive and cash bonus components further align the executive officers’ performance with stockholder interests. The Committee’s philosophy is to review all components of compensation, including base salary, bonus and equity incentives, and to provide a total compensation package that is competitive against a group of comparable industrial companies. Base Salary. In establishing and recommending base salaries for the Chief Executive Officer and other executive officers, the Committee considers compensation information of a peer group of comparable industrial companies. This peer group includes some of the same companies as the S&P Industrial Machinery and the S&P Industrial Conglomerates Indices used for the Company Performance graphs on pages 25 and 26. In determining base salary, the Committee considers the executive officer’s past performance and potential future performance, as well as ITW’s net income and the operating income of the business units that the officer oversees. The Committee’s objective is to target base salaries of the Chief Executive Officer and the other executive officers at the 50th percentile of the peer group. Bonus. Executive officers receive annual cash bonuses under the Executive Incentive Plan based on predetermined financial and non−financial objectives, the criteria for which have been approved by ITW stockholders. This Plan is Section 162(m) compliant. Executive officers may elect to take up to half of their annual cash bonus in ITW common stock. The maximum bonus opportunities range from 70% to 200% of base salary, and as a result, a greater percentage of executive total compensation is at risk. The Chief Executive Officer, Vice Chairman and certain executive officers can earn half of the maximum bonus opportunity if ITW’s net income is at least 120% of targeted plan. The other half of the maximum bonus opportunity relates to the individual’s performance measured against predetermined management goals. The Chairman’s non−financial goals in 2005 included 22
  • 28. Table of Contents broad−based organizational succession planning and transition for Chief Executive Officer and other major staff functions. The Chief Executive Officer’s non−financial goals in 2005 included working with the Chairman on transition to the Chief Executive Officer position, assisting new Executive Vice Presidents to assure smooth transitions to their new roles, and work with all Executive Vice Presidents in developing long range plans for their business groups. The 2005 non−financial goals of the Vice Chairman and certain other executive officers related to such things as succession planning, cost reduction targets, market penetration, acquisition planning and a variety of other objectives specifically related to the individual unit’s performance. For the Executive Officers, one half of the maximum bonus opportunity is based on the income performance of operating units under the manager’s control, referred to as the “P” factor. This is a pre−tax income amount at the business unit level and a net income target at the corporate level. The other half of the maximum bonus opportunity is based on the manager’s achievement of personal objectives or “O” factors. For 2005, the average bonus received by executive officers was approximately 93.7% of the maximum award. The average award received by the named executive officers was approximately 94.0% of the maximum award. Stock Incentives. The Chief Executive Officer, executive officers and certain other key employees participate in the 1996 Stock Incentive Plan, principally through the grant of stock options and restricted stock. The magnitude of a stock incentive award is based on the executive officer’s position, performance, and ability to influence ITW’s long−term growth and profitability over a period of years. Options are priced at fair market value on the date of grant. In January 2004, the Committee granted restricted stock to certain key domestic employees and later in 2004 returned to its historical approach of granting stock options. The Committee believes that these grants are a further effective incentive for executive officers to create value for stockholders. On December 7, 2005, the Committee approved stock option awards with a grant date of February 1, 2006 to the Chief Executive Officer, executive officers and certain other key employees. Since this grant was not effective until February 1, 2006, it is not represented in the Summary Compensation Table this year but will be reflected in next year’s table. Stock Ownership Guidelines. The Board of Directors and the Compensation Committee have established stock ownership guidelines to further the objective of aligning the interests of executive officers and directors with stockholder interests. These guidelines apply to elected and appointed corporate officers, as well as to non−employee directors. Recommended stock ownership as a multiple of executive officers’ base salaries and of directors’ annual retainers is as follows: Chief Executive Officer, five times; Vice Chairman and Executive Vice Presidents, three times; Senior Vice Presidents, two times; Vice Presidents, one time; and non−employee directors, four times. The Committee recommends that an executive officer or non−employee director achieve the applicable ownership level within five years. As of December 31, 2005, all officers and directors who have been in their position for five or more years had satisfied the guidelines. Deductibility. Internal Revenue Code Section 162(m) limits the deductibility of compensation in excess of $1,000,000 paid to each of the named executive officers employed 23
  • 29. Table of Contents at year end. Certain performance−based compensation and deferred compensation is not included in compensation counted for purposes of the limit. The Committee recognizes its obligation to reward performance that increases stockholder value and exercises its discretion in determining whether or not to conform ITW’s executive compensation plans to the approach provided for in the Code. William F. Aldinger, Chairman Michael J. Birck Susan Crown Robert C. McCormack Robert S. Morrison James A. Skinner 24
  • 30. Table of Contents Company Performance Shown below are two graphs covering a five−year comparison and a ten−year comparison of cumulative total returns for ITW, the Standard & Poor’s (S&P) 500 Composite Index, the S&P Industrial Conglomerates Index and the S&P Industrial Machinery Index. The graphs assume an investment of $100 on December 31, 2000 for the five−year period and December 31, 1995 for the ten−year period, including reinvestment of dividends. Total returns are based on market capitalization. Five−Year Performance 25
  • 31. Table of Contents Ten−Year Performance Report of the Audit Committee The Audit Committee of the Board of Directors is composed of five independent directors, as defined in the listing standards of the New York Stock Exchange. In addition, the Board of Directors has determined that all Audit Committee members are “financially literate” and that Messrs. Aldinger, Birck, Davis and Skinner meet the Securities and Exchange Commission criteria of “audit committee financial expert”. The Audit Committee operates under a written charter adopted by the Board of Directors, which was reviewed by the Committee in February 2006. The Committee is responsible for providing oversight to ITW’s financial reporting process through periodic meetings with ITW’s independent public accountants, internal auditors and management in order to review accounting, auditing, internal control and financial reporting matters. The Committee is also responsible for assisting the Board in overseeing: (a) the integrity of ITW’s financial statements; (b) ITW’s compliance with legal and regulatory requirements; (c) the independent public accountants’ qualifications, independence and performance; and (d) the performance of ITW’s internal audit function. ITW’s management is responsible for the preparation and integrity of the financial reporting information and related systems of internal controls. The Committee, in carrying out its role, relies on ITW’s senior management, including senior financial management, and ITW’s independent public accountants. 26
  • 32. Table of Contents We have reviewed and discussed with senior management the audited financial statements included in the 2005 Annual Report to Stockholders. Management has confirmed to the Committee that the financial statements have been prepared in conformity with generally accepted accounting principles. We have reviewed and discussed with senior management their assertion and opinion regarding internal controls included in the 2005 Annual Report to Stockholders as required by Section 404 of the Sarbanes−Oxley Act of 2002. Management has confirmed to the Committee that internal controls over financial reporting have been appropriately designed, and are operating effectively to prevent or detect any material financial statement misstatements. We have also reviewed and discussed with Deloitte & Touche LLP, ITW’s independent public accountants, its audit and opinion regarding ITW’s internal controls as required by Section 404, which opinion is included in the 2005 Annual Report to Stockholders. We have reviewed and discussed with Deloitte & Touche LLP the matters required to be discussed by the Statement on Auditing Standards No. 61 (Communications with Audit Committee) under which Deloitte & Touche LLP must provide us with additional information regarding the scope and results of its audit of ITW’s financial statements. This information includes: (1) Deloitte & Touche LLP’s responsibility under generally accepted auditing standards; (2) significant accounting policies; (3) management judgments and estimates; (4) any significant audit adjustments; (5) any disagreements with management; and (6) any difficulties encountered in performing the audit. We have received from Deloitte & Touche LLP a letter providing the disclosures required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) with respect to any relationships between Deloitte & Touche LLP and ITW that in its professional judgment may reasonably be thought to bear on independence. Deloitte & Touche LLP has discussed its independence with us, and has confirmed in the letter that, in its professional judgment, it is independent of ITW within the meaning of the federal securities laws. The Committee also discussed with ITW’s internal auditors and independent public accountants the overall scope and plans for their respective audits. The Committee meets periodically with the internal auditors and independent public accountants, with and without management present, to discuss the results of their examinations, their evaluations of ITW’s internal controls, and the overall quality of ITW’s financial reporting. Based on the reviews and discussions described above, we have recommended to the Board of Directors that the audited financial statements included in ITW’s 2005 Annual Report to Stockholders be included in ITW’s Annual Report on Form 10−K filed with the Securities and Exchange Commission for the year ended December 31, 2005. Don H. Davis, Jr., Chairman William F. Aldinger Michael J. Birck Marvin D. Brailsford James A. Skinner 27
  • 33. Table of Contents Proposal to Amend our Restated Certificate of Incorporation On March 6, 2006, our Board of Directors authorized a two−for−one split of our common stock, to be effected in the form of a stock dividend of one share for each share outstanding on the record date, subject to stockholder approval of an increase in the number of authorized shares of our common stock. Without an increase, there would be an insufficient number of shares to effect the stock split. Accordingly, our Board of Directors recommends that action be taken by stockholders to amend our Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 350,000,000 to 700,000,000 shares. The amendment to the first paragraph of Article Fourth of our Restated Certificate of Incorporation adopted by the Board of Directors, which stockholders are being asked to approve, reads as follows: “FOURTH. (1) Authorized Shares. The total number of shares of stock of all classes which the corporation shall have authority to issue is seven hundred million three hundred thousand (700,300,000), of which three hundred thousand (300,000) shall be shares of Preferred Stock, without par value, and seven hundred million (700,000,000) shall be shares of Common Stock, par value $.01 per share.” As of March 7, 2006, 282,968,754 shares of the 350,000,000 authorized shares of our common stock were issued and outstanding, leaving insufficient shares available to effect a two−for−one stock split. Approval of the proposed amendment, after giving effect to the stock split, would result in there being 565,937,508 shares of our common stock issued and outstanding (based on the number of outstanding shares on March 7, 2006). Accordingly, 134,062,492 shares of our common stock would remain available for future issuance; however, assuming that our stockholders approve the proposed 2006 Stock Incentive Plan at the Annual Meeting, 70,000,000 of these shares would be reserved for issuance under that Plan, leaving 64,062,492 shares unreserved and available for future issuance. As of March 7, 2006, there were no shares of our preferred stock issued and outstanding. The additional shares of common stock sought by the amendment will be available for issuance without further action by stockholders unless stockholder action is required by applicable law or the rules of any stock exchange on which our securities may then be listed. The holders of our common stock have no preemptive rights to subscribe for or to acquire any additional issues of common stock or securities convertible into or entitling the holder to purchase shares of common stock. The NYSE currently requires specific stockholder approval as a prerequisite to listing shares in several instances, including an acquisition transaction in which the issuance of shares could result in an increase of 20% or more in the number of shares of common stock outstanding. We intend to apply for listing on the New York Stock Exchange and the Chicago Stock Exchange of the additional shares of common stock to be issued in connection with the stock split. 28
  • 34. Table of Contents Our Board of Directors believes that the proposed increase in the number of authorized shares of common stock is in the best interests of ITW and its stockholders. The Board anticipates that the increase in the number of outstanding shares of common stock as a result of the stock split may place the market price of our common stock in a range more attractive to investors and may result in a broader market for the stock. In addition, our Board of Directors believes that we should have sufficient authorized but unissued shares for issuance in connection with future employee benefit programs, mergers, acquisitions, and other corporate purposes. In many of these situations prompt action may be required, which would not permit seeking stockholder approval in a timely fashion to authorize additional shares for the specific transaction. Although the additional shares of common stock would provide future flexibility, other than for purposes of the stock split, we have no present plans for their use. The reason for seeking an increase in the number of authorized shares of common stock is not for anti−takeover purposes. Nevertheless, securities rules require disclosure of charter and by−law provisions that could have an anti−takeover effect. Our Restated Certificate of Incorporation contains the following provisions: (1) the Board of Directors has the authority to issue one or more series of preferred stock up to a maximum of 300,000 shares; (2) stockholders may not take action by written consent; (3) a special meeting of stockholders may only be called by the chairman, the president, or a majority of the Board of Directors; and (4) certain business combinations require approval by a two−thirds vote of the stockholders. These provisions could permit the Board of Directors to place stock in friendly hands, delay or deter or otherwise make more difficult a takeover of ITW. While permitted under Delaware law, our charter and by−laws do not provide stockholders with cumulative voting. To effect the two−for−one stock split, payable in the form of a stock dividend, the number of authorized shares of common stock must be increased. In the opinion of the Board of Directors, such an increase is in the best interests of stockholders. If adopted, the amendment to Article Fourth of our Restated Certificate of Incorporation will be effective at the close of business on the date of filing the amendment to our Restated Certificate of Incorporation with the Delaware Secretary of State. We anticipate that the filing will occur on May 9, 2006. Stockholders of record at the close of business on May 18, 2006 would receive an additional stock certificate, par value $.01 per share, representing one additional share of our common stock for each share held. Stockholders should retain certificates issued prior to those dates, and not return them to us or our transfer agent, as these certificates would continue to represent the same number of shares shown on the certificate. We anticipate that certificates representing additional shares to be issued to entitled stockholders would be mailed on or about May 25, 2006. The Board of Directors recommends that you vote “FOR” the amendment of our Restated Certificate of Incorporation 29
  • 35. Table of Contents Approval of the Illinois Tool Works Inc. 2006 Stock Incentive Plan The Board of Directors has approved, subject to stockholder approval, the Illinois Tool Works Inc. 2006 Stock Incentive Plan (the “2006 Stock Incentive Plan”) as an amendment and restatement of the Illinois Tool Works Inc. 1996 Stock Incentive Plan (the “1996 Plan”). The Board believes that the approval of the 2006 Stock Incentive Plan is in the best interests of ITW and its stockholders. In the Board’s view, the 2006 Stock Incentive Plan is an important tool in ensuring the highest level of performance from ITW’s key employees and non−employee directors by providing them with an opportunity to acquire an ownership interest in ITW. The 2006 Stock Incentive Plan is a stock−based compensation plan that provides for grants of stock options, stock awards, performance units, restricted stock units and stock appreciation rights to key employees and non−employee directors. The Plan is intended to encourage key employees and non−employee directors to have a greater financial investment in ITW through ownership of our common stock. The 2006 Stock Incentive Plan also is intended to incorporate by merger the non−deferral provisions of the Illinois Tool Works Inc. Non−Officer Directors’ Fee Conversion Plan approved by the Board on February 19, 1999 and amended December 15, 2000, and to succeed the Directors’ Restricted Stock Plan approved by stockholders at the annual meeting on May 5, 1995. If the stockholders approve the 2006 Stock Incentive Plan, (i) no further grants of restricted shares will be made under the Directors’ Restricted Stock Plan, and (ii) any share purchases and issuances previously made pursuant to the Directors’ Fee Conversion Plan will thereafter be made pursuant to the 2006 Stock Incentive Plan. No awards shall be made under the 2006 Stock Incentive Plan unless it is approved by stockholders. The following summary of the 2006 Stock Incentive Plan describes the material features of the plan; however, it is not complete and, therefore, you should not rely solely on it for a detailed description of every aspect of the plan. The full text of the plan document, is available on the SEC’s website (www.sec.gov) as an appendix to this proxy statement. We will also provide copies of the Plan upon request. Stockholders are encouraged to review the plan document carefully. DESCRIPTION OF THE 2006 STOCK INCENTIVE PLAN General. The Compensation Committee administers the 2006 Stock Incentive Plan, determines the key employees and non−employee directors who will participate in the Plan and receive awards, and determines the timing and amount of awards and the specific provisions of award agreements which may include, for example, provisions for the forfeiture of an award if the participant competes with ITW or engages in other conduct that adversely affects ITW, and provisions allowing acceleration of exercisability or the lapse of restrictions in the event of death, disability, retirement or other specified event. The number of key employees and non−employee directors who will participate in the future, and the amounts of any awards, cannot now be determined. With respect to the prior plans, on March 1, 2006, approximately 523 key employees were eligible to participate in the 1996 Plan and all non− 30